An adjustable-rate mortgage (ARM) typically offers a lower initial interest rate than a traditional 30-year fixed loan. You will often hear them expressed as five-year, seven-year or ten-year ARMs; that means that you will have the same rate for that specific amount of time. A five-year ARM means the rate is fixed for the first five years, and so on.
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After the fixed-rate period expires, the rate will adjust up or down for the remainder of the 30-year loan, depending on market conditions and the LIBOR index. But the good news is there are caps to keep your mortgage payment under control. An initial cap is the maximum amount the rate can adjust after the fixed period. The periodic cap limits increases from one adjustment period to the next. The lifetime cap puts a limit on how much the rate can increase over the life of the loan.
However, once the fixed period expires, it’s common for folks to refinance their loan to continue enjoying a low monthly payment.
But when does it make sense to get such a loan? What are the situations that make getting an ARM a good financial move? Here are five scenarios where you might consider an ARM so you can accomplish other life or financial goals.
- First-Time Home Buyer – You might be single or recently married and want to get a place of your own. You consider this your beginner house and do not intend on staying longer than five to seven years.
- Going to Move in a Few Years – You anticipate moving before the fixed period of the ARM expires and plan to make use of the lower payment to accomplish other things in the meantime – perhaps even saving for a down payment on a new home. But, in the event you do not find a new place before the rate adjusts, you are financially prepared to handle a payment fluctuation.
- Never in One Location for Long – You have a career that makes it difficult to put down roots. For example, you might be an athlete, serve in the Armed Forces or work in another field that requires frequent relocation.
- Facing an Empty Nest – Your kids have gone off to college or moved out on their own. You might want to downsize or move to a different location. An ARM can help save extra money for a down payment on a home that is a more suitable size.
- Ready for Retirement – If you are planning to retire soon and part of that plan includes wanting to either relocate, refinance or pay off the remainder of your mortgage, having a low monthly payment until that decision is made sounds good.
Depending on your situation, an ARM can help you take advantage of several years of low mortgage payments, allowing you to do more with your money. Be sure to have an honest discussion with your home loan lender about your financial goals to see if an ARM makes the most sense for you.