5 Great Reasons to Choose an Adjustable Rate Mortgage

When you're shopping for a new home or looking to refinance your existing home loan, it's very important to do your homework. Don't be afraid to know your options or to ask your lender questions. How long do you plan on staying in your home? Are you considering an Adjustable Rate Mortgage (ARM)?
Although ARMs have often been misunderstood in the past, you might be surprised to learn many people still choose ARMs. In fact, it can be a great financial opportunity for the right person. We've compiled a list of the top 5 reasons you may want to consider getting an ARM for your new home refinance or loan.
Why would you choose an ARM?
1. Lowest Possible Mortgage Rates. Interest rates are currently among the lowest in history and ARM loans are one way to bring them even lower. An ARM has a fixed period where the rate won't change, typically 3, 5 or 7 years. The rate is lower, often much lower, than the popular 30-year fixed rate mortgage. The market rate for an ARM today is at 3.875% vs. 5.125% for a conventional 30-year FHA mortgage.
2. You Don't Plan On Staying In A Mortgage Very Long. Because homeowners know they are only in a fixed-rate period for a short amount of time, an Adjustable Rate Mortgage is best used if you know you are moving before the fixed-rate period is over, if you plan on using the money saved by the lower interest rate to pay more towards your premium or if you're planning on refinancing before the ARM begins to adjust.
3. You Can Save Money. Even including closing costs on a refinance, you are still saving money over a traditional mortgage. For example on a $200,000 home loan, if you were to get a 30-year fixed-rate mortgage at 4.75%, your monthly payments would be $1,043 a month. If you were to get a 5-year ARM at 3.5%, your monthly payments would be $898 for a 5-year savings of $8,700. Add in closing costs - at $2,000, even - you will still save $5,700 of your hard earned money.
4. ARMs do not always adjust up! Most people assume that after the fixed period expires, their rate will rise. This is not always the case. You could start with a 5-year ARM at 4.25% and when it becomes time for the rate to adjust, market prices may be considerably lower. This can prove to be quite a bit of savings for you to pay towards the principle of your home, or use the money to pay off debt!
5. Adjustable Rate Mortgages are more popular than you think. In the United States, may financially savvy people choose an ARM, mainly because you can save money. In fact, in some countries, like Canada or the United Kingdom, ARMs are the most common form of home loans. This is often due to the fact that you can pay more towards the principle of the loan, early and without penalty. Early reduction payments reduce the total cost of the loan and allow you to pay off your loan in less time.
Remember, while Adjustable Rate Mortgages are able to save you money over the fixed-rate period, they may not be for everyone. Make sure you talk to your mortgage lender to determine if an ARM is for you, make sure you know all of the facts before signing. Does your lender have prepayment penalties? What is the fixed-rate ratio? Make sure you are aware that while rates can go down - this means they also can rise as well. If you are aware of the risks, and have a firm understanding of how an ARM works, then it can prove to be a very positive experience for you!
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