The rate of interest of an adjustable-rate mortgage (ARM) changes over time. There are both positives and negatives to opting for an ARM. Experts advise that you should get an ARM if you plan to sell off the property in the first few years.
An ARM has a low fixed rate in the first few years: usually three, five, or seven years of the mortgage term. After this, also known as the introductory period, the interest rate changes based on the benchmark index. If your interest rate is higher than the index, your interest rate will be reduced. But if the interest rate is lower than the index, it will increase. This change usually occurs once in six months.
Getting an ARM will help if you plan to sell your home before the adjustable period starts (within three, five, seven, or ten years, depending on your loan).
It is also beneficial if you plan to pay off the mortgage early because you expect some major financial influx — such as an inheritance. The low introductory interest rates can help you save money, and you can pay off a considerable amount of money, or even the entire remaining balance with the funds you’re expecting to receive. An ARM can also help if you prefer the initial low and the later higher interest rates.
Consider all possible outcomes and scenarios before deciding to go ahead with an ARM. Financial stability is key when taking up any kind of loan, but especially an ARM because there’s no way to predict how much the interest rate will change, or even whether it will increase or decrease. You’ll need to have enough funds to cover the mortgage in case there’s a sudden rise in the rates while ensuring that you have enough saved up for other expenses and debt.
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