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When an Adjustable Rate Mortgage Makes Sense

When an Adjustable Rate Mortgage Makes Sense

By now we've all heard the news about how adjustable rate mortgages (ARM's in industry terms) have hit a lot of mortgage holders by surprise and causing a real ripple in the housing market, even for those with stellar credit.  With inflation and prices rising to levels not seen since the 1970s, it seems that everyone is trying to make their dollars go further nowadays. 

When your monthly mortgage payment takes a big jump it can really have a huge impact on your household budget.  Yet, despite all the bad news about ARM's there are times when it makes sense to go into an ARM mortgage versus a traditional, fixed mortgage.

One way to benefit from an ARM is to know the maximum monthly payment you can afford and then work backwards from it to find an entry level payment that leaves with you with money left over to do other things (such as pay for a child's college) and then over time increases to its maximum level.  An example of this is say you could easily afford a $1,200 a month mortgage payment, but opt to take an ARM with a lower interest rate up front that lets you make $600 payments for the first two years, $800 days for the next 3, and then after 8 years finally works its way up to the $1,200 per month.  You still get the house you want with a payment you can afford while all the while taking advantage of keeping more money in your pocket up-front. 

The second way you can benefit from an ARM is by knowing up-front that you won't be in the house for a long enough period to be penalized by the higher rates down the road.  Perhaps you already know that you want to move when the kids are grown, or that your job will be moving you to somewhere else down the road.  You can take advantage of low interest rates now knowing that you will sell the house before you have to pay the higher rates later.  Of course this all assumes that your plans don't change down the road!

One final reason that people use ARMs is to buy more house now than they could afford.  Typically this tactic is used by people who are just starting off in their career.  It's perhaps the most risky of the reasons to use an ARM, but can be beneficial to the home buyer assuming his or her salary rises over time to take care of the rising rates.

As with any mortgage, ARM or not, carefully read over all the paperwork before you sign the agreements.  Make sure your lender tells you how often the rate will change and what the changes will be ahead of time.  Be sure to budget out your expenses and ability to pay the mortgage both now, and in the future when the rates change. 

Using an ARM wisely can help you take control of your finances and get you the house that you always wanted.  However, unlike a traditional mortgage there is a lot more upfront planning that one should undertake before signing on the dotted line.