Top 5 Reasons to Get an Adjustable Mortgage

Adjustable rate mortgages (ARMs) are riskier; still, there are quite a few reasons to select an ARM over a standard fixed rate mortgage.

When it comes to adjustable mortgages, the interest rate on the loan can increase or decrease. It depends on the market conditions. It is a bit like gambling and there is no way to predict what the rates will be like five or ten years from now. So why should anyone gamble when they can get a fixed-rate home loan with predictable EMIs?

While it is true that nobody can predict how the interest rate will move in the future, there are still several reasons to get an ARM. In fact, for some homebuyers, an adjustable mortgage is a much better option than a fixed-rate mortgage. Here are the top 5 reasons to get an adjustable mortgage.

Low initial monthly payments

When you choose an ARM, you monthly EMIs during the initial period will be much lower. All ARMs have an initial period during which the rate of interest is fixed. This initial period can last between three months to ten years. During the initial period, the interest rate on your adjustable mortgage will be lower than the interest rate on a standard fixed-rate mortgage. This is a huge draw for many borrowers.

More savings

Since the initial monthly payments on the mortgage will be relatively low, you will be able to save more money. You can either invest this money or use it to pay down the loan faster.

Enjoy the benefits of lower rates

It is impossible to predict whether the interest rates will go up or down in the future. But if the rates drop (that is very much a possibility), your monthly payments will drop as well. By contrast, people who have a fixed-rate home loan will have to get refinancing to enjoy the lower interest rates. Refinancing can be costly. In addition, it is a time-consuming process.

Ideal for short term investors

If you are a short term investor who plans to sell the home in the near future, an adjustable mortgage is the best option for you. You just need to ensure that you sell the property before the rate hike kicks in. This way, you can not only enjoy lower initial monthly payments, but also protect yourself from possible rate increases in the future. If you intend to sell the home before the initial period expires, you have every reason to get an ARM

Rate caps

Even if interest rates go up in the future, they can't go beyond a certain limit.  Adjustable mortgages have rate caps and the rate on your mortgage can never exceed that limit. Read the mortgage documentation and disclosures carefully to make sure that you will be able to live with the highest possible monthly payments.

But before arriving at the final decision, you should do the math. First, decide how long you will be staying in the house. If you are planning to live there for five or six years, you should get an ARM with an initial period of seven years. Now compare the initial rates on a standard fixed-rate and an adjustable rate home loan. It wouldn't be hard to see that the benefits of an ARM outweigh the risks, at least during the initial period.