Why Choose an Adjustable Rate Mortgage (ARM)?

One of the first things you must do when shopping for a new home to buy, is pre-qualify for your mortgage.  It lets you know what your shopping budget will be, and how much you can expect to pay monthly for your house.  However, there are many types of mortgages, and you'll have to pick one early on.

Most people gravitate to the Fixed Rate mortgages, which mean that there won't be any guesswork tied to one's monthly payment.  Excepting a final payment which might vary a little, the payment remains predictable for its entire term.  On the face of it, this seems really attractive.  Many are drawn to the inherent financial stability.

A lessor known option is the Adjustable Rate Mortgage, which means the interest rate on the loan changes over the life of the loan.  Even among the ARM's, there is variability.  Some offer a fixed rate for the initial year or years, and then adjustments at differing intervals thereafter.  Clearly, the rate on the loan affects the monthly outgo, and the amount of change in interest rate and monthly payment aren't known ahead of time. Why would this appeal to a home buyer?

They are attractive for a number of reasons - if you know you will pay the loan off ahead of time, it can be a way to hedge your bets against lower rates if they exist right now.  They also may be a good choice for people who won't be pinched financially by a potential rise in monthly payment.

In decades past when rates were high and expected to fall, an ARM could help a borrower take advantage of (projected) falling rates without having to refinance the loan.

One salient point is that ARM's can come with caps on how much the rate can rise.  If you believe rates will rise dramatically in the future, your cap may in fact beat the rise - and that would be smart!  In decades past, this was certainly true.  It's less of a factor right now, when rates are at historic lows - but as with all things, these go through cycles.

It's definitely a more complex choice, but because it has benefits for some, it's worth a look.  You may want to talk it over with your financial adviser (and not just your lender) to see what will be your own best fit.  You might qualify for financial advising through your workplace Employee Assistance benefits, or through your financial institution - it's worth looking into when you're on the cusp of a major life purchase like a home.

To dive a little deeper on this subject, try this article on NerdWallet.com, or this Investopedia article.  (Nerd Wallet in particular is a great personal finance resource.)

When you're ready to start shopping for your next Kitsap area home, give us a ring at Dupuis Team.  We can walk you through every single step, and we even love to talk over deeper points like ARM's!  We look forward to hearing from you!