Is an Adjustable Rate Mortgage Right for You?

By Richard Pisnoy

Homebuyers are looking for low interest rates and low monthly payments.  So it’s not uncommon for us to receive phone calls from buyers who have just found their dream house and now need financing saying, “I want to apply for an Adjustable Rate Mortgage.”

After a little conversation we learn that a neighbor, friend, colleague at work, or family member told them that this is “absolutely the only way to go.”

So let’s take a look.

For a long time the Adjustable Rate Mortgage (ARM) has had a stigma associated with it that the product is bad, high risk, and was one of the causes for the market crashing in 2008.

Without getting political, the ARM definitely can be the right product for many people.  Depending on how long someone plans on being in their home for instance.

If you have a 5-year ARM, the rate is fixed for 5 years. It’s typically lower than the 30-year fixed rate. If you plan on moving within those 5 years, this loan can make perfect sense.  Why pay a higher interest rate and higher payment if you don’t have to?

The ARM may also give a borrower that will see an increase in income over the next few years the ability to move into a home today.  So it could be a viable answer.

But given today’s market and low interest rates, the Fixed Rate Mortgage (FRM) is often just as affordable as the ARM, and a safer bet.

Here’s why. The FRM is the most risk adverse loan out there today.  The simple reason is that your rate is fixed for 30 years.  Rates are still at historic lows.  Why not sleep better at night knowing that your rate will not adjust?  If you plan on living in your home for a long period of time –– 10-plus years –– this loan is right for you.  The FRM offers a fixed payment that can never change.

There are countless other scenarios that will dictate the most appropriate loan for you and your neighbor may be right.  But why take the chance?  Without hesitation, we always recommend home buyers speak to a mortgage professional about a mortgage plan that makes the most sense for them and their situation.