If you’re looking for a home mortgage offering flexibility and an initial low interest rate, consider an adjustable rate mortgage (ARM).

An adjustable rate mortgage, also known as a hybrid mortgage, is a home loan with a flexible interest rate that changes over the life of the loan. An ARM differs from a fixed rate mortgage, which maintains the same interest rate for the entire loan term.

Popular hybrid ARM mortgages, referred to as 3/1, 5/1 and 7/1 ARMs, offer initial fixed interest rate periods for three, five or seven years. After the initial period, the interest rate adjusts up or down once a year for the remainder of the loan’s term, depending on the market.

What are the benefits of an adjustable rate mortgage?

An adjustable rate mortgage offers financial benefits over a fixed rate mortgage, depending on current mortgage interest rates and your financial situation.

Homebuyers often find it easier to qualify for an ARM mortgage due to the lower interest rate and smaller monthly payments.

While an ARM mortgage is less predictable than a fixed rate loan, the flexible interest rate may benefit the homebuyer. If interest rates fall during the adjustable rate period, you'll save without refinancing the loan, which is often the only way to lower monthly payments with a fixed rate mortgage.

ARMs typically include yearly and lifetime rate caps, meaning interest rates cannot surpass a set percentage each year, or a set percentage over the life of the home loan.

What are the disadvantages of an adjustable rate mortgage?

Some homebuyers avoid adjustable rate mortgages because of the uncertainty of future interest rate adjustments.

If the interest rate increases during the adjustable rate period, your monthly payments increase too. The uncertainty makes it difficult to budget monthly mortgage payments.

For many homebuyers, an ARM mortgage makes the most financial sense if you plan to move or refinance before the rate adjustment occurs.

Your mortgage loan officer will help you decide if an adjustable rate mortgage provides the most financial benefit to you. As with any financial decision, it’s important to ask questions, research all options and weigh the pros and cons before choosing a mortgage loan solution.

Adjustable rate mortgage: Pros & Cons

Pros:	Cons:
Easier to qualify Flexible loan terms Lower initial payments	Uncertainty can make it difficult to budget More complex loan terms Unpredictable monthly payments

 

Want to learn more about adjustable rate mortgage options? Call 1.800.205.3464 to speak to a First Merchants Bank loan expert today.