“Do you think an adjustable rate mortgage is a good idea?” The answer, of course, is, “It depends.”

Over the long term (years) rates are expected to creep higher. So a key factor in deciding upon an adjustable rate mortgage is how long a borrower will be paying a higher rate of interest in the future with the ARM versus what a borrower would pay with a fixed rate mortgage today.

The obvious advantage of the ARM is the lower interest rate and payment for the initial period the rate is fixed before it converts to an adjustable rate. Note that the straight ARM, one that can adjust every month, is pretty much gone from the market place. The ARMs that are available in the current market are what are known as hybrid-ARMs in that the initial rate is fixed for a period of time, 3, 5, 7 or 10 years, and then adjust annually thereafter.

Borrowers should be asked, “Are you a good money manager?”, “Are you in a profession where your income is not always the same, perhaps commission based or self-employed?”, “Is your intention to take advantage of the lower initial rate to pay down your mortgage more rapidly than the fixed rate mortgage?”, and “Is there a reasonably strong certainty you will be selling the home before the fixed rate term of the ARM expires?”

The payment on an ARM is typically significantly lower than on a 30 year fixed – often hundreds less every month depending on loan amount and rate. And if this savings is carried out over several years, the savings would be in the thousands. But after five years, or seven years, will the borrower still be in the home? And will they able to afford the higher payments IF rates move higher and IF they didn’t refinance?

ARMs received a bad reputation as part of the housing and mortgage market melt downs, but much of this was due to the misuse of the ARMs by lenders and borrowers. For many who took out ARMS prior to the meltdown they have benefited from very low rates as their loans convert(ed) from fixed to adjustable and were a good tool. For others who miscalculated on future income, future appreciation or used the ARM to highly leverage into a property they otherwise would not have been able to afford the choice was perhaps not the best one.

Every borrower should discuss their options with an experienced loan officer.


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