Pros and Cons of Adjustable Rate Mortgages

Adjustable rate mortgages can be risky depending on how the housing market and the economy are doing. But, sometimes choosing an adjustable rate mortgage over a fixed mortgage can prove to be a solid economic choice and save you thousands of dollars over the course of your mortgage. Still can’t decide? Here are the pros and cons of adjustable rate mortgages:

Pros

• You can save a lot of money during the fixed-rate period (if you have a Hybrid ARM).
• Rates are still at a historic all-time low, which means that as of right now, the change in rates won’t be that dramatic.
• If you’re only going to be staying in that home for a short amount of time (less than five years), you will end up saving a lot of money as long as there’s no prepayment penalty to worry about.
• You will be protected by borrower caps, which essentially means that you won’t have to pay rates that go above a certain amount.

Cons

• Your interest rates can drastically increase after the initial rate period, which means that your monthly payments can also increase. Sometimes, homeowners don’t account for this potential and ultimately end up losing their homes to foreclosure.
• If you sell or refinance the home before the first five years of the mortgage, you may have to pay a prepayment penalty.
• If you easily stress about money or are self-employed, you might not want to get an ARM. Because the interest rates change so much and so frequently, you might be stressed with not knowing how much your next payment will be.If you decide you want a fixed-rate loan, it’s expensive to refinance into that at a later date.