What is an Adjustable-Rate Mortgage – Pros and Cons

June 9, 2023

When considering a home loan, it’s important to explore all your financing options to find the best fit for your goals. One option to consider is an Adjustable-Rate Mortgage (ARM). In this blog post, we will delve into the pros and cons of ARMs, providing you with insights to help make an informed decision. Partnering with a mortgage lender, such as Firefighter Credit Union, can guide you through the intricacies of ARMs and their potential impact on your financial future.

Pros of Adjustable-Rate Mortgages

  1. Lower Initial Interest Rates: ARMs typically offer lower introductory interest rates compared to fixed-rate mortgages. This can lead to lower monthly payments initially, making it an attractive option for borrowers who plan to sell, refinance, or pay off their home within a few years.
  2. Potential for Savings: If interest rates decrease over time, borrowers with ARMs can benefit from lower monthly payments and potential long-term savings compared to fixed-rate mortgages. However, in today’s financial environment interest rates are high with no sign of relief in sight. During these economic times, ARMs should be used with caution.
  3. Flexibility: ARMs often come with various term options, allowing borrowers to choose a loan that aligns with their financial plans. This flexibility can be advantageous for those with specific homeownership goals or financial circumstances.

Cons of Adjustable-Rate Mortgages

  1. Rate Adjustments: After the initial fixed-rate period, ARMs adjust periodically based on market conditions. This means that your interest rate and monthly payment can increase, potentially leading to higher costs. It’s important to consider your financial stability and ability to handle potential rate adjustments. It is also essential to thoroughly consider market conditions and predictions.
  2. Uncertainty: ARMs introduce an element of uncertainty into your mortgage payments. While the interest rate adjustments are typically capped, the actual changes in rates can be unpredictable, which may make budgeting and long-term financial planning more challenging.
  3. Potential for Negative Equity: If housing prices decline or remain stagnant, borrowers with ARMs may face the risk of owing more on their mortgage than the value of their home. This situation, known as negative equity or being “underwater,” can limit refinancing or selling options.
  4. Limited Stability: Fixed-rate mortgages provide the stability of consistent monthly payments, which can be appealing for budgeting purposes. ARMs, on the other hand, can result in fluctuating payments, making it crucial to carefully assess your financial situation and tolerance for potential changes.

Adjustable-Rate Mortgages (ARMs) offer unique advantages and considerations when compared to fixed-rate mortgages. Working with a trusted mortgage lender like Firefighters Credit Union can help you navigate the complexities of ARMs and determine if they align with your financial goals and risk tolerance. Remember to weigh the pros and cons before making a decision that suits your long-term homeownership plans and contact us if you need more information.

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