Adjustable rate mortgages (ARMs) are a popular option for many home buyers, as they offer greater flexibility and potential savings than fixed-rate mortgages. There are certain circumstances where an ARM can be especially beneficial. In this article, we’ll explore three situations when you should consider getting an adjustable-rate mortgage. By understanding how ARMs work, you may be able to save money on your next home purchase or refinance.

What is an Adjustable Rate Mortgage?

Adjustable rate mortgages (ARMs) are a type of mortgage loan in which the interest rates can change during the term of the loan. ARMs usually start with a lower initial rate, often referred to as a “teaser” or “introductory” rate. After this period has passed, the rate will adjust to a predetermined rate, which is usually higher than the initial rate.

How Adjustable Rate Mortgages Work

An ARM loan begins with a fixed or initial period where the interest functions at a set rate for a predetermined period, typically 3, 5, or 10 years. Following the fixed period, the loan enters into an adjustment period where the rate of interest fluctuates, typically every six months or a year. The new interest rate is determined based on the index plus margin.

There are many situations where buyers can benefit from purchasing an ARM mortgage loan.

Buyers Expect to Live in The Home For a Short Time

The first situation when an ARM should be considered is if you plan to stay in the home for only a short period of time after getting a loan. ARMs are perfect for those looking to move or upgrade their home within five years, as they can take advantage of the lower initial rate. This could potentially save you thousands of dollars over a fixed-rate mortgage, as long as you can sell or refinance before the rate adjusts after the introductory period has passed.

Interest Rates Are High And Expected to Decline

The second situation when an ARM should be considered is when interest rates are high and you anticipate they will decline in the near future. ARMs are a great way to take advantage of lower rates if you think they’ll decrease within 12-24 months. If interest rates don’t decline, however, you may end up paying more than if you had taken out a fixed-rate mortgage.

Buyers Need a Smaller Mortgage to Pay Off Other Debt

The third situation when an adjustable rate mortgage should be considered is when a buyer needs a smaller mortgage to pay off other debt. ARMs can offer significant savings over traditional, fixed-rate mortgages, particularly in cases where the borrower has a lower credit score and would not qualify for the best interest rates. Additionally, ARMs allow borrowers to take out smaller loans, which can be beneficial to those who need to pay off other debt.

If you or someone you know is considering buying a home, reach out to one of our agents to evaluate if your situation would be best served by a fixed rate or ARM mortgage loan. Our agents are trained to educate home buyers about the advantages and disadvantages of an ARM mortgage loan. Call us at 847-214-2404 to get started.

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Ed currie