An adjustable rate mortgage (ARM) can be a real hassle. Sure, that low, low intro rate from a three years back got you into more house for the money, but now that interest rates have gone up, where does that leave you? The bottom line is that an ARM, while it may sound good initially, is not a good long term real estate move. Even if you fully expect the Fed to cut rates sometime this year.
What is an adjustable rate mortgage?
An ARM is just what it sounds like: a mortgage home loan with a rate that changes. As the interest rates go up or down, so too does your mortgage interest rate. Many financial institutions will lure you with a lower interest rate if you sign an ARM. This is because they know that in a few months, they are likely to get more money as your interest rate goes up. And, while an ARM can feel great when interest rates are going down, over time they are much more likely to go up overall. This leaves you paying more money in the long run than you thought you would.
Advantages to an ARM
There is one main advantage to the adjustable rate mortgage: you can get more house for the money. Like its cousin the interest-only home loan, an ARM offers a lower initial interest rate. This means that you will have lower monthly payments to start, meaning that you can afford to get more house for the amount of money that you have. However, it is important to note that the payments on an ARM may go down, while the payments an interest-only home loan will only go up, even if the interest rate is locked in. A lesser advantage is that you often have more flexible payment options, which can make an ARM desirable for first-time homebuyers.
Advantages of getting rid of your ARM
If you already have an adjustable rate mortgage, there are definite advantages to getting rid of it. In the first place, you can lock in an interest rate that is likely to be lower overall in the long run. Second, you gain the stability and security of the same payment every month. With an ARM, your payment changes as interest rates change and interest charges go up or down, adjusting what you owe. Finally, the money you save over the life of a home loan can reach into the thousands–or even tens of thousands–of dollars.
Note: if you refinance an ARM to a fixed rate mortgage, and you have less than 20 years left, get your refi to reflect that, rather than opting for another 30 year mortgage.