The Pros and Cons of Adjustable Rate Mortgages

Adjustable rate mortgages received a bad rap, and some have even linked them to the 2008-2009 housing crisis. Yet they remain a useful financial product and are perfect for several customer demographics. Adjustable rate mortgages or ARMs have both their pros and cons, so they aren’t right for everyone. We’ll address both their advantages and disadvantages in this article.

The Pros of Adjustable Rate Mortgages

Adjustable rate mortgages are a good choice if you only plan on staying in the house for a few years. You pay at today’s low-interest rates and don’t have to worry about the house payments increasing in a few years. You’ll pay much less than the standard 30-year fixed rate mortgage.

Adjustable rate mortgages often have a low teaser rate that allows you to aggressively pay down the mortgage before adjusting up in two or three years. Conversely, they come with low-interest rates even if the rate is not going to ratchet up later. For example, Franklin American mortgage rates are some of the lowest in the industry. Franklin is also notable for participating in a variety of loan programs like the USDA loan program, VA loans, and FHA loans.

The low-interest rates that come with ARMs may allow someone to secure a home in a rising market before they’re priced out of it.

The Cons of Adjustable Rate Mortgages

Adjustable rate mortgages can go up as interest rates rise. This caused many people to lose their homes when their 1% mortgage rates skyrocketed to 6% or more. The worst ARM products sold to subprime borrowers before the 2008 financial crisis often resulted in people building up no equity at all before resetting to a high interest fixed rate mortgage. When shopping for an adjustable rate mortgage, don’t just select a loan with the lowest interest rate – look for a loan with a cap on how high and how fast the interest rate can go.

Observations about Adjustable Rate Mortgages

Research the conditions for various adjustable rate mortgage products. Some lenders will let you refinance an adjustable rate mortgage to a fixed rate mortgage with a modest fee. Others will charge you a hefty fee to lock in a fixed rate. A few lenders also give you prepayment penalties if you try to use the savings from an ARM rate to pay down the balance too fast. Know the rules and restrictions on the mortgage before you select it.

If you’re building home equity while paying down your adjustable rate mortgage, don’t turn around and cash it out in a home equity loan later. This will add to your monthly payments while destroying your equity, creating problems if you have to sell the house later when it may be worth less than you owe.

Conclusion

Adjustable rate mortgages have their fair shares of advantages and disadvantage and may fit a certain type of borrower or certain market conditions better. Still, adjustable rate mortgages are an excellent way for many to buy a home, especially if they expect to move or see incomes rise in a couple of years.


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