Pros and Cons of an Adjustable-Rate Mortgage

Mortgage Rates

This article will describe what an adjustable-rate mortgage is and when it may make sense to utilize when purchasing or refinancing a current mortgage.

An adjustable-rate mortgage or ARM as it is known in the industry starts with a lower fixed rate (also known as a teaser rate) for a period of 3 – 10 years. After the initial fixed term, the rate can typically adjust either every 6 months or annually for remainder of the term. Terms on ARMs are typically 30 years. The rate can adjust upward or downward and is normally capped on how high the rate can rise. The ARM also utilizes a baseline index such as LIBOR or the equivalent.

The pros of an ARM are lower payments compared to a 15 or 30 year fixed at least for the initial term. As mentioned above the ARM does have caps for your protection. The one definite advantage is flexibility in case you don’t expect to be in the house for a long period of time. If you are planning on moving, then you can take advantage of the lower initial rate.

The cons of an ARM are obvious in the risk that your rate could and typically does go up especially if the industry is in a rising rate environment. ARMs are also a more sophisticated type of mortgage offering as well.

Determining on whether an ARM is good for you it is best to consult with a trusted, qualified mortgage consultant to discuss whether it should be considered. You can call your Hall Financial Home Loan Advisor to discuss.