Is An Adjustable Rate Mortgage The Best Choice?

By Author: Scott F. Staudt
Total Articles: 91
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Most borrowers now know that ARM stands for Adjustable Rate Mortgage, or a mortgage that has an interest rate that adjust every certain period. ARMs became important when interest rates were increasing and banks no longer wanted to take the risk of lending at 4 or 5% and then seeing their costs of funds skyrocket to 10 or 12%.

This was not an issue until recent decades, since interest rates did not change as dramatically years ago.

Most ARMs are for thirty year mortgages, although shorter periods are available. Most homeowners don't actually concern themselves with the term of an ARM, but rather how frequently the rate "resets". If you think you will be in your home for an extended period, you should try to get the longest fixed rate period you are able to.

For other borrowers, a 5 year adjustable rate mortgage is probably the best bet for most homeowners. You do not want to take a chance on an ARM that changes the interest rate more quickly. If you have an initial rate of 6% and then the rate increases to 8% and back down to 7% in a five year period, you have missed the middle spike in rates.

Those ...
... who had an ARM that adjusted annually would have had to pay each of the increases on the way to 8%. Luckily, most ARMs have some kind of top interest rate cap as a part of the agreement.

How long you plan on staying in your home will have a big impact on the kind of ARM you choose. If you plan on being in a home for a few years, the initial rate of an ARM is the only rate that is of concern to you. If you think you will be in a home for six or seven years, try to negotiate a seven year adjustment. However, reset periods of more than 5 years are not common.

The other option to examine in ARMs is what the reference financial instrument is: LIBOR, Tbills, Tnotes, etc. Each of these has benefits and disadvantages, based on the amount of time of the mortgage and the borrower's concept of the future of interest rates and tolerance of fluctuating payments. Remember that if you have an ARM that adjusts often, your monthly payment will change often.

If budgeting is an important issue for you, having your mortgage payment bounce up and down usually not is not a good idea.
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