Buying and financing a home is one of the biggest financial decisions you are likely to make in your lifetime. It can be especially overwhelming if it is the first time you’re buying and financing a home.
(It’s still a little overwhelming even if it’s the fifth time you’re buying and financing a home.)
The same overwhelm can set in if you are refinancing a home in the New Year.
While there is a no one-size-fits-all option when it comes to choosing a mortgage, knowing all of the options that are available to you and taking a look at the pros and cons can help you narrow down the best options for you.
Adjustable-rate mortgages (ARMs) have an interest rate that can fluctuate up or down over the life of the loan. Generally, adjustable-rate mortgages have lower interest rates than fixed-rate mortgages, but this is not always the case.
During periods when we have experienced record-low interest rates, there have been times when adjustable rate mortgage interest rates and fixed rate mortgage rates are the same or close.
The adjustment period for the mortgage can vary from loan to loan, but some adjustable rate mortgages adjust monthly and others adjust annually.
The biggest pro to having an adjustable rate mortgage occurs when interest rates drop. When interest rates drop, your adjustable rate mortgage adjusts, and you end up paying less as a monthly mortgage payment.
Because adjustable rate mortgages tend to have lower interest rates starting out than fixed rate mortgages, another advantage is that you start out with lower payments than you would with a fixed rate mortgage.
One of the biggest cons of establishing an adjustable rate mortgage is when the interest rates increase, your adjustable rate mortgage adjusts up, and you end up paying more as a monthly mortgage payment.
Even though you start out with lower monthly mortgage payments using an adjustable rate mortgage, it puts you at risk for an increasing mortgage payment, if and when rates increase.