Many people decide to take the conservative approach when applying for a mortgage and choose to get a fixed rate mortgage. While fixed rate mortgages offer security that most borrowers need, there are financial benefits to getting an adjustable rate mortgage (ARM) for the right borrowers. Not everyone would benefit from having an adjustable rate mortgage, but here are some ways to tell if an adjustable rate mortgage is a good fit for you:
You expect a large increase in income.
If you are in a career where you are guaranteed a substantial pay increase within the upcoming months and years, an adjustable rate mortgage may make a lot of sense. During the first term of your ARM you can enjoy the lower interest rate and monthly payment. These payments will be substantially lower than if you were to get a fixed rate mortgage. By the time your mortgage rate adjusts you know that your pay raise associated with your job will be in place.
You don’t plan on staying in the home long term.
One of the biggest reasons to get an adjustable rate mortgage is if you know you won’t be in a home for a long period of time. If you plan on selling your home before the rate adjusts or only after one adjustment you can save substantially on the amount of interest you pay. During this time you will have increased your amount of equity substantially more than if you had a fixed rate mortgage and will see a greater return on investment while selling the home.
You do not overextend yourself.
There is one caveat to getting an adjustable rate mortgage. It may be tempting to spend more money on a house and maxing out your monthly budget with your initial low rate. A good benchmark to make sure you are not overextending yourself is to see how much you could afford based on the cap of your rate. By assuring that you can afford the highest monthly payment based on the cap of your rate you can have security that you will have no issues making your payments.
Having an adjustable rate mortgage can save you significant money in your monthly payment in the short term. There is also a significant savings in having an adjustable rate mortgage over the life of the loan. They key is being conservative in the amount of money you borrow rather than in the type of loan product you choose.