Adjustable Rate Mortgage Pros and Cons Explained

Adjustable-rate mortgages (ARMs) have been growing in popularity in recent years, especially as interest rates have risen. ARMs offer lower introductory interest rates than fixed-rate mortgages, which can make them more affordable for borrowers in the short term. However, it's important to understand the risks of ARMs before you choose one.

Current popularity

According to the Mortgage Bankers Association, ARMs accounted for 8.7% of all new mortgage applications in the third quarter of 2023. This is up from 6.9% in the same quarter of 2022. The increase in popularity of ARMs can be attributed to a number of factors, including:

Rising interest rates: Interest rates have been rising steadily in recent months, making fixed-rate mortgages more expensive. ARMs offer lower introductory interest rates, which can make them more affordable for borrowers in the short term.
Inflation: Inflation has also been rising in recent months, making it more difficult for borrowers to afford a down payment on a home. ARMs can allow borrowers to buy a home with a smaller down payment.

Expectations of lower interest rates in the future: Some borrowers believe that interest rates will fall in the future. If this happens, their ARM interest rate will also fall, which could save them money on their mortgage payments.
Pros and cons of ARMs

ARMs have both pros and cons. Here is a summary:

Pros:

1. Lower introductory interest rates: ARMs typically offer lower introductory interest rates than fixed-rate mortgages. This can make them more affordable for borrowers in the short term.
2. More flexible terms: ARMs offer more flexible terms than fixed-rate mortgages. For example, borrowers can choose a shorter or longer introductory period, and they can also choose a different type of ARM, such as a hybrid ARM or a step-rate ARM.
3. Potential to save money: If interest rates fall in the future, borrowers with ARMs could save money on their mortgage payments.

Cons:

1. Higher interest rates in the future: If interest rates rise in the future, borrowers with ARMs could face higher monthly mortgage payments.
2. Uncertainty: ARMs can be more complex and unpredictable than fixed-rate mortgages. This can make it difficult for borrowers to budget for their monthly mortgage payments.
3. Less stability: ARMs can be less stable than fixed-rate mortgages. This is because the interest rate can change periodically, which can impact the borrower's monthly mortgage payments.

Are ARMs right for you?

Whether or not an ARM is right for you depends on your individual circumstances. If you're considering an ARM, it's important to talk to a mortgage lender to understand the risks and benefits involved.

Here are some things to consider before you choose an ARM:

1. Your financial situation: Are you comfortable with the risk of your interest rate rising in the future? Can you afford to make higher monthly mortgage payments if necessary?
2. Your plans for the future: Do you plan to stay in your home for the long term? If so, an ARM may not be the best choice for you.
3. Your risk tolerance: Are you comfortable with uncertainty? ARMs can be more complex and unpredictable than fixed-rate mortgages.

If you're not sure whether or not an ARM is right for you, it's always a good idea to talk to a financial advisor. They can help you to assess your individual circumstances and make the best decision for your financial future.