Pros And Cons Of An Adjustable Rate Mortgage

Many people have heard bad things about ARM, or adjustable rate mortgages, but there are just as many advantages to refinancing your home with an ARM as there are disadvantages. If you are considering refinancing your current home loan, and have a fixed rate home loan at the moment, an ARM loan is definitely worth looking at, as far as saving money on your repayments, and getting a better interest rate goes.

What Is An Adjustable Rate Mortgage?

An adjustable rate mortgage is a home loan that has significantly lower interest rates than any offered fixed rate mortgage at any given time. These adjustable rates on an ARM can change over the life of the loan in accordance with current markets and trends, unlike a fixed rate mortgage where the rates are never subject to change over the life of the loan.

What Are The Benefits?

By far the greatest benefit of refinancing, using the adjustable rate mortgage option is the savings gained by having a lower interest rate. It is hard to believe, but a small difference in interest rates, such as half a percent, over the course of a year can equate thousands of dollars.

What Are The Risks?

There are risks involved when you refinance with an adjustable rate mortgage loan. The riskiest type of ARM loan is the type that has no fixed term attached to it. Although the interest rates will be even lower than the average rates offered on a fixed term ARM loan, the rates on an ARM loan that isn't fixed are subject to change monthly, or yearly. An ARM loan that is fixed for a particular period, such as 5 years, is much safer, because you are getting a very low interest rate, locked in over a period of five years.

Who Will Benefit From An Adjustable Rate Mortgage?

Almost anyone can benefit from a fixed rate ARM mortgage. According to financial statistics many American families either sell their homes, or refinance after four years. If you are like many others, having a 5-year fixed ARM loan there is very little risk, with a much lower interest rate on offer.

The only risk is that after the 5 years is over on a fixed rate, if you can't refinance, or choose not to sell, and interest rates do get higher, you will have to pay more on your repayments. The ARM rate is especially helpful to lower income bracket families, or for those who want to pay their home off quicker than they are already.

By keeping your monthly repayments the same, and refinancing to an adjustable rate mortgage with a much lower interest rate, the money that you are saving because of the lowered interest rates can be coming directly off your principal each month. This can mean you are shaving years off your mortgage, without paying anything more than you were before you refinanced.