Adjustable Rate Mortgages

An adjustable rate mortgage is just as the name suggests. The rate on the mortgage is adjustable and will change periodically based on some indicator.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the first year's payments. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage--for example, if interest rates remain steady or move lower.

Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off--you get a lower rate with an ARM in exchange for assuming more risk.

Here are some questions you need to consider:

1. Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
2. Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
3. How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
4. Can my payments increase even if interest rates generally do not increase?

Related Article: Interest Only Mortgages >>