Hi there, I'm Sheri Henson, a finance expert and professional writer. I've seen many people struggle with their mortgage payments and I want to help. In this article, I'll be discussing adjustable rate mortgages and whether or not they're the right choice for you.
The Problem with Adjustable Rate Mortgages
Adjustable rate mortgages (ARMs) are a type of mortgage where the interest rate changes over time. While they may start out with a lower interest rate, they can become unpredictable and increase dramatically, leaving homeowners struggling to make their monthly payments. This uncertainty can cause financial stress and even lead to foreclosure.
The Solution: Fixed Rate Mortgages
If you're looking for stability and predictability in your mortgage payments, a fixed rate mortgage may be a better option. With a fixed rate mortgage, your interest rate stays the same for the entire length of your loan, giving you peace of mind and making it easier to budget your monthly expenses.
What is an Adjustable Rate Mortgage?
An adjustable rate mortgage is a type of mortgage where the interest rate changes over time. Typically, the interest rate starts out lower than a fixed rate mortgage, but can increase or decrease based on market conditions. This means that your monthly mortgage payment can also change over time.
The Pros of Adjustable Rate Mortgages
One of the main advantages of an adjustable rate mortgage is that your initial interest rate may be lower than a fixed rate mortgage, which can save you money on your monthly payments. Additionally, if interest rates decrease, your mortgage payments may also decrease, giving you even more savings.
Another advantage of an adjustable rate mortgage is that they typically have a cap on how much the interest rate can increase, which can protect homeowners from dramatic increases in their monthly payments. Plus, if you plan on moving or refinancing before the interest rate increases, you may be able to take advantage of the lower initial rate without experiencing any negative effects.
The Cons of Adjustable Rate Mortgages
On the other hand, the main disadvantage of an adjustable rate mortgage is that your monthly payments can become unpredictable and increase significantly over time. This can cause financial stress and make it difficult to budget for other expenses, especially if you're living on a fixed income.
Additionally, if you're planning on staying in your home for a long period of time, an adjustable rate mortgage may not be the best choice. If interest rates increase, your mortgage payments could become unaffordable, leaving you with the difficult decision of either selling your home or facing foreclosure.
Success Story
One of my clients, Sarah, was struggling to make her monthly mortgage payments on her adjustable rate mortgage. After discussing her options with me, she decided to refinance to a fixed rate mortgage. This gave her the stability and predictability she needed to make her monthly payments more manageable and avoid the risk of foreclosure.
FAQ
What is the difference between a fixed rate and adjustable rate mortgage?
A fixed rate mortgage has a set interest rate that stays the same for the entire length of the loan, while an adjustable rate mortgage has an interest rate that can change over time based on market conditions.
What is the initial interest rate on an adjustable rate mortgage?
The initial interest rate on an adjustable rate mortgage is typically lower than a fixed rate mortgage.
What is the cap on an adjustable rate mortgage?
An adjustable rate mortgage typically has a cap on how much the interest rate can increase over the life of the loan.
When should I consider an adjustable rate mortgage?
If you're planning on moving or refinancing before the interest rate increases, an adjustable rate mortgage may be a good option. Additionally, if you're comfortable with the risk of your mortgage payments increasing over time, an adjustable rate mortgage may save you money on your monthly payments.
What is the disadvantage of an adjustable rate mortgage?
The main disadvantage of an adjustable rate mortgage is that your monthly payments can become unpredictable and increase significantly over time, causing financial stress and making it difficult to budget for other expenses.
Can I switch from an adjustable rate mortgage to a fixed rate mortgage?
Yes, you can refinance your mortgage to switch from an adjustable rate mortgage to a fixed rate mortgage.
What are the benefits of a fixed rate mortgage?
A fixed rate mortgage offers stability and predictability in your monthly payments, making it easier to budget for other expenses. Additionally, if interest rates increase, your mortgage payment stays the same.
Can I still take advantage of lower interest rates with a fixed rate mortgage?
No, your interest rate stays the same for the entire length of the loan with a fixed rate mortgage.
The Pros of Fixed Rate Mortgages
A fixed rate mortgage offers stability and predictability in your monthly payments, making it easier to budget for other expenses. Additionally, if interest rates increase, your mortgage payment stays the same, giving you peace of mind and protecting you from financial stress.
Tips for Choosing the Right Mortgage
When choosing a mortgage, it's important to consider your financial situation and long-term goals. If you're looking for stability and predictability, a fixed rate mortgage may be the best option for you. However, if you're comfortable with the risk of your monthly payments increasing over time and want to save money on your initial payments, an adjustable rate mortgage may be a good option.
Summary
Adjustable rate mortgages can be a good option for some homeowners, but they come with a lot of risk and uncertainty. If you're looking for stability and predictability in your monthly payments, a fixed rate mortgage may be the better choice. Take the time to consider your financial situation and long-term goals before making a decision on which type of mortgage to choose.