An adjustable-rate mortgage (ARM) can be a great option for many homebuyers, helping to reduce monthly payments and cut long-term costs in some cases.
Unlike a traditional fixed-rate mortgage, an ARM features a rate that adjusts at a regular interval, relative to an index – usually the prime index published in the Wall Street Journal. ARMs generally feature lower initial rates than traditional mortgages, offering lower monthly payments as you begin your home ownership. The trade-off for these lower rates and benefits is a higher long-term risk, as you assume the risk that interest rates will continue to rise over the life of the mortgage, leading to higher rates, higher payments and a higher total cost than a fixed-rate mortgage.
An ARM may be a good option if you fit into one of these special situations:
- If you plan to sell your home within the first ten years, you can enjoy the lower initial rate without much long-term risk.
- If you are confident your future income would cover a potential rise in rate and monthly payment, you can comfortably assume this risk.
- If you intend to use your monthly savings to pay off other debt or make specific investments in your new property, an ARM can be a smart choice.
However, be aware of all the terms of your ARM, as there may be high costs to refinancing at a later date, as well as penalties if you attempt to avoid long-term risk by paying off your mortgage early.
If you are planning to buy a home, be sure to sit down with one of the experienced lending professionals at HFCU. We will help you find the home financing option that’s right for your goals, your budget and your lifestyle.