Looking for advantages and disadvantages of Adjustable Rate Mortgage?
We have collected some solid points that will help you understand the pros and cons of Adjustable Rate Mortgage in detail.
But first, let’s understand the topic:
What is Adjustable Rate Mortgage?
An Adjustable Rate Mortgage (ARM) is a type of home loan where the interest rate can change over time. This means your monthly payments might go up or down. The rate changes are based on the economy or rules set by the lender.
What are the advantages and disadvantages of Adjustable Rate Mortgage
The followings are the advantages and disadvantages of Adjustable Rate Mortgage:
|Lower initial interest rate||Higher risk of payment increase|
|More affordable early payments||Unpredictable future rates|
|Interest rate may decrease||Not ideal for long-term plans|
|Flexibility with market changes||More complex than fixed-rate|
|Potential for lower total cost||Potential for negative amortization|
Advantages of Adjustable Rate Mortgage
- Lower initial interest rate – Adjustable Rate Mortgages start with a lower interest rate, making it appealing to borrowers. This initial rate is lower than that of fixed-rate mortgages.
- More affordable early payments – The early payments are more affordable due to the lower initial interest rate. This can be a relief for borrowers who need to manage their budget.
- Interest rate may decrease – There’s a chance the interest rate could decrease over time. If market interest rates drop, the rate on your mortgage could follow suit.
- Flexibility with market changes – Adjustable Rate Mortgages offer flexibility with market changes. If rates fall, you benefit without having to refinance.
- Potential for lower total cost – There’s a potential for a lower total cost. If interest rates remain low throughout your mortgage term, you could end up paying less overall compared to a fixed-rate mortgage.
Disadvantages of Adjustable Rate Mortgage
- Higher risk of payment increase – An Adjustable Rate Mortgage can lead to a higher risk of payment increase. This means your monthly payments might go up over time.
- Unpredictable future rates – The rates in the future can be unpredictable. You might end up paying more interest than you initially thought.
- Not ideal for long-term plans – If you have long-term plans, such as living in your home for many years, this type of mortgage may not be ideal. Your payments could rise significantly over time.
- More complex than fixed-rate – Adjustable Rate Mortgages are more complex than fixed-rate ones. They can be harder to understand and manage.
- Potential for negative amortization – There’s a potential for negative amortization with this type of mortgage. This means you could owe more on your mortgage than your home is worth.
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