A fixed-rate mortgage is a type of loan where the interest rate stays the same for the entire term of the loan, typically 15 or 30 years. An adjustable-rate mortgage (ARM), on the other hand, has an interest rate that changes over time, typically based on a benchmark interest rate such as the U.S Treasury rate. If you’re considering switching from a fixed-rate mortgage to an ARM, there are a few things you should know before making the switch.
Pros of Switching to an ARM:
- Lower Interest Rates: An ARM can offer a lower interest rate and lower monthly payments than a fixed-rate mortgage in the short term. This can be especially beneficial for those who plan on living in their home for a shorter period of time, as they will be able to take advantage of the lower interest rate for the initial period of the loan.
- Flexibility: An ARM can offer more flexibility than a fixed-rate mortgage, as the interest rate can be adjusted based on the current market conditions. This can be beneficial for those who are looking to refinance their mortgage and want to take advantage of the current interest rates.
Cons of Switching to an ARM:
- Risk of Rising Interest Rates: The interest rate on an ARM can increase over time, potentially resulting in higher monthly payments in the future. This can make an ARM a risky choice for some borrowers, especially if they are not prepared for the potential increase in payments.
- Complexity: Adjustable-rate mortgages come in many different variations, each with its own set of terms and conditions. It’s important to understand the terms of your ARM and how they will affect your payments over time.
- Lack of Predictability: With an adjustable-rate mortgage, your interest rate and monthly payments will change over time, making it harder to predict your long-term mortgage expenses.
- Limited Eligibility: Not all borrowers will qualify for an adjustable-rate mortgage. If your credit score is low or you have a limited income, you may not be able to get approved for an ARM.
Before switching to an ARM, it’s important to consider your current financial situation and your plans for the future. It’s also important to work with a qualified mortgage professional who can guide you through the process and help you make the best decision for your situation. It’s important to weigh the pros and cons and decide if an ARM is the best fit for you.
Keep in mind that interest rates are subject to change, and the housing market is unpredictable, so it’s important to make an informed decision. Ultimately, the decision to switch from a fixed-rate to an adjustable-rate mortgage depends on your individual financial situation and goals.