Reasons to get an Adjustable-Rate Mortgage

By Sari R. Updated on 6/20/2017

Rising mortgage interest rates are inspiring many prospective homebuyers to explore alternatives to fixed-rate mortgages. If you are looking for an alternative to a fixed-rate mortgage, you may want to consider an adjustable-rate mortgage. An adjustable-rate mortgage (ARM) can offer you significant short-term savings on their mortgage.

Read on to see if this sort a loan is a right fit for your mortgage needs:

You Don’t See Yourself Staying in Your Home Long-Term

It doesn’t make sense to lock in a mortgage rate for thirty years if you that you won’t be living in the home for that long. On average, homeowners move every 5-7 years, especially if their occupation is subject to relocation.

If you know how many years you'll be staying in your house, you can get an ARM to match the length of the term. The initial term of an ARM loan ranges from 1 to 10 years, so you'll be able to find one that matches the loan.  

The most popular loans have an initial fixed period of 5, 7, and 10 years.

You Want Flexible Payments and Considering a 15-Year Loan

ARM loans are especially helpful for those who want to refinance to a 15-year mortgage but want to avoid the high monthly payments. Because ARMs are meant to amortize over thirty years, you can obtain a loan with interest rates similar to 15-year fixed-rate loans (with a much smaller monthly payment). 

If you happen to be able to continue making the same payments (as if paying off a 15-year loan), you'll enjoy greater payment flexibility if a need should arise. 

Also, if you choose this path, you'll find that because you are paying extra principal every month, any interest rate increase will be mitigated by a lower principal balance.

You Want to Pay Off the Mortgage in the First 7 to 10 Years

This is a great option if you have a high-interest rate on a jumbo mortgage.  Borrowers who are planning retirement in the next 7-10 years, want a tax deduction of having a mortgage, and want their investments to continue to grow will often take advantage of an ARM loan.

You Want to Build Home Equity as Quickly as Possible

You can get a 7/1 ARM with an initial rate that is fixed for the first seven years and is often lower than a 30-year fixed rate. For example, if you have a $300,000 mortgage, the 7/1 ARM is going to save you money every month.  If you put that extra money towards your mortgage payment, you'll be able to increase your home equity within those seven years.

Are adjustable-rate mortgages a smart choice?

The reason why ARMs have decreased in popularity is that fixed rates have been low recently nd home affordability has been excellent.  Also, recent underwriting changes have affected the ability to qualify for an ARM loan.

When used correctly, ARMs offer responsible borrowers a very logical way to finance a home. Since fixed-rate mortgage rates have remained near record lows, the majority of borrowers won’t even look into taking out an adjustable-rate mortgage since they want to lock in low rates. 

However, if you have any of the situations mentioned above, an ARM may be a viable way to finance a home purchase.

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