Home-buying is exciting but can also be intimidating for some, especially when obtaining a mortgage. There are many options, including adjustable-rate mortgages. Learning about this loan type can help potential borrowers make the right financial decisions for their home-buying needs. 

What Is An Adjustable-Rate Mortgage?

An adjustable-rate mortgage, often called an ARM, is a loan with interest rates that reset at various intervals throughout the term. At the onset, adjustable-rate mortgages have low fixed rates that can save home buyers money. These loans become costlier as the rates begin to fluctuate. Borrowers interested in an adjustable rate mortgage must educate themselves on the possibilities, including the pros and cons. 

How Do Adjustable-Rate Mortgages Work?

ARMs have variable interest rates that can change every few months. The most common type is the hybrid ARM. Hybrid ARMS allow borrowers to pay a fixed rate for several years before the interest rate becomes adjustable for the remaining term. The rates adjust based on the market index. Although the rates can go up or down, there are usually caps that limit how much they can increase at each interval of the loan term. 

There are three types of ARM caps:

• The initial adjustment cap is the maximum amount the interest rate can increase on the first adjustment. 
• The subsequent adjustment cap is the maximum amount the interest rate can increase at all adjustments after the first. 
• The lifetime adjustment cap is the maximum amount the interest rate can increase over the life of the mortgage. 

Pros and Cons of Adjustable-Rate Mortgages

Any loan has pros and cons, and ARMs are no exception. Borrowers must examine these to determine whether an adjustable-rate mortgage suits their home purchase needs. 

Pros

Certain aspects of adjustable-rate mortgages attract borrowers. Examine the pros below to learn more about these loans and their benefits.

Lower Initial Fixed Rates

Many borrowers seek ARMs because of the low initial fixed rates. This advantage is ideal for borrowers who plan on staying in their homes for a few years and want to save as much money as possible on the payments. Home buyers can plan to sell their homes before the rate increases. 

Rate Caps

Although these loans have variable interest rates, borrowers can take comfort in knowing the caps of their loans before signing. Caps can help keep ARMS more affordable by preventing extraneous rate hikes. 

Potential Payment Decreases

Although there is the potential for interest rates to increase, borrowers may also see rate decreases depending on market changes. Just like there are caps to prevent significant increases, there are also interest rate floors that prevent the rates from dropping too low. 

Cons

While ARMs can serve borrowers well in some circumstances, there are drawbacks. Consider the following disadvantages:

Increasing Interest Rates

The most significant drawback of ARMs is the increase in interest rates. Although borrowers know the caps before obtaining the loan, the rates can rise to 5% more. Many home buyers find themselves cutting corners in other areas when rates go up.

Limited Availability

Not every mortgage lender offers adjustable-rate mortgages, making them more challenging. Shopping around and finding lenders specializing in ARMs and offering favorable terms is essential. 

Are ARMS Right For Your Home Buying Needs?

Adjustable-rate loans are not for every borrower, but they do offer advantages. Borrowers should learn as much as possible about ARMs and talk with various lenders to get the best terms.