Getting a mortgage loan is a big deal for most people. Once you have obtained the loan you are going to live with it for the next 15 to 30 years which is why it is a very big decision to make. Typically, you would opt for the fixed rate mortgage loans because you know you won’t get any nasty surprises down the road. You will simply be paying the same amount year after year until you it all off. This is a good move from one aspect as you will not run the risk of having to pay a higher amount when the market interest rate is at its peak.

However, a fixed rate mortgage is not always a good thing. There are times when adjustable rate mortgage loans will give you better benefits. Before you get too excited, you should first understand what an adjustable rate mortgage (ARM) really is and what it entails. If a fixed rate mortgage is a home loan with fixed, never-changing interest rate, an adjustable rate mortgage is exactly the opposite. The interest rates of an adjustable rate mortgage change and fluctuate according to the current indices and margins. It does sound riskier because it is close to impossible to predict if the interest rates are going to decline or increase in the future. So when is it the right time for you to opt for an ARM mortgage loan instead of a fixed rate mortgage?

1) Your house is a short term investment
If you are buying a property with the intention of remodeling it and then sell it off, an ARM loan is the smart way to go. An ARM loan typically starts of with a very low fixed rate for a few years. The rate changes at every end of an adjustment period. Let’s say you apply for an ARM loan with an adjustment period of 5 years. This means that your interest rate will change every 5 years. So if you plan to sell your house within 5 years from the date of your purchase, an ARM loan is a good option as you will be paying the initial low fixed rate and sell it off before the interest rate changes.

2) You want to go for lower interest rates
An ARM loan does not come with the security of a fixed rate so it is often cheaper than that of a fixed rate loan by about 1%. So if you want to start off with a cheaper monthly payment you should consider applying for an ARM loan. If you know for sure that your income will increase over the years, you can always keep your ARM loan until the entire amount is paid of at the end of the loan term. However, if you are not sure, you can still opt for an ARM loan for the first few years. You will have the option of refinancing your home loan later on when the interest rate is due to change. This way you can convert your ARM loan to a fixed rate second mortgage loan at a lower interest rate than that if you start off immediately with a fixed rate mortgage.

3) You have reason to believe the interest rate will stay low
It is nearly impossible to predict the fluctuations of interest rates. Due to this fact, most people would opt for a fixed rate mortgage loan. However, if you think that the interest rate will be on the low side for a long time, by all means, consider an adjustable rate mortgage loan. How do you predict the fluctuations of an ARM loan interest? You simply don’t. But current market trends do have a way of giving you hints on what the rate is going to be like for the next few years.

Most financial advisors would advise against adjustable rate mortgage loans simply because of the higher risk especially if the interest rate suddenly goes up sky high. But it is not always a bad thing to go for. So if you are very sure that an ARM loan is the best option for you, go ahead. But make sure that you will be able to make larger payments down the road should the interest rate increases dramatically.

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Category: Finances
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