Contrary to popular belief, Adjustable Rate Mortgages are actually fixed for an initial period of time, that can either be 3, 5, 7, or 10 years—depending on what the home-owner’s needs are at that time. Essentially, it is a short-term fixed mortgage because it is fixed for a number of years and then the interest rate may adjust.
Adjustable Rate Mortgages (also known as ARMs) are a great tool to save money during the beginning of your loan period.
Some of the benefits of an Adjustable Rate Mortgage include:
- It’s a fixed rate for a set number of years and you know when to expect the interest rate to adjust
- Lower interest rate and lower payments for the initial period (and potentially for life of loan)
- Interest rates can drop
- Provides flexibility and allows for change
- Caps can protect borrowers
It makes perfect sense for people who aren’t looking to stay in the same home for the full 30 years (conventional fixed loan term) to choose an ARM. It’s also a feasible option for people who are looking to pay their loan down quicker because the payments are lower, therefore offering more flexibility of paying down loans and making smaller payments (if necessary).
In reality, things in your life are going to change every few years so it’s a great option for people who don’t know exactly where they will be in the next 5, 7, years and so on.
Like any loan, as long as you understand it and have a plan in place, it’s a great option. For more information on Adjustable Rate Mortgages, check out our video.