When most homebuyers think about mortgages, the traditional 30-year fixed-rate loan probably comes to mind.
But with today's interest-rate environment, some borrowers are taking another look at adjustable-rate mortgages, or ARMs.
An ARM isn't right for everyone, but understanding how one works can help you determine whether it's worth considering.
An adjustable-rate mortgage generally begins with an interest rate that remains fixed for an initial period.
After that introductory period ends, the interest rate can adjust periodically based on the loan's terms and the applicable index.
For example, a 5/6 ARM generally has a fixed rate for the first five years and can then adjust every six months.
The primary attraction is that an ARM may offer a different initial rate than a comparable fixed-rate mortgage.
That can make an ARM worth evaluating for buyers who don't expect to own the property for decades or who anticipate selling or refinancing before the adjustable period begins.
However, those future events should never be assumed.
With a fixed-rate mortgage, the interest rate remains the same for the life of the loan.
With an ARM, the rate — and therefore the monthly principal-and-interest payment — can potentially increase after the fixed period.
ARMs have rules governing how much the rate can change, so borrowers should understand the initial adjustment cap, subsequent adjustment caps and lifetime cap before choosing one.
There isn't one answer for every borrower.
A fixed-rate mortgage can provide long-term payment predictability, while an ARM may be worth evaluating for borrowers with a shorter anticipated ownership horizon or particular financial strategy.
The key is comparing both options based on more than the introductory rate.
Ask your mortgage professional to show you the potential payments under different ARM adjustment scenarios so you understand both the opportunity and the risk before making a decision.
