The Pros and Cons of Adjustable-Rate Mortgages
Mortgage refinancing can be a smart financial move to reduce your monthly mortgage payments or pay off your mortgage faster. Among the mortgage options, adjustable-rate mortgages (ARMs) are gaining popularity. ARMs are mortgages with fluctuating interest rates that change periodically, usually every year. Adjustable-rate mortgages usually start with a low-interest rate that makes them attractive to homebuyers. However, adjustable-rate mortgages come with a set of advantages and disadvantages that you should consider before refinancing your mortgage.
Pros of Adjustable-Rate Mortgages
- Lower initial interest rates: Adjustable-rate mortgages usually start with lower interest rates than fixed-rate mortgages. This is because the rate is only fixed for a short period, usually between one and five years. If you plan on refinancing your mortgage after a few years, an adjustable-rate mortgage can save you money on your monthly payments.
- Better purchasing power: With lower initial interest rates, you may qualify for a larger mortgage and purchase a larger, more expensive home than with a fixed-rate mortgage.
- Lower total interest paid: If you plan on selling your home before the initial fixed-rate period ends, you can benefit from the lower interest rate without having to worry about future rate hikes. This can result in significant savings on total interest paid over the life of your mortgage.
- No prepayment penalties: Most adjustable-rate mortgages do not come with prepayment penalties, which means you can pay off your mortgage in part or in full without any fees or charges.
Cons of Adjustable-Rate Mortgages
- Higher future interest rates: After the initial fixed-rate period ends, your interest rate may rise substantially, making your monthly payments higher. It is essential to understand the cap on interest rate increases and budget for potentially higher payments in the future.
- Higher risk: Adjustable-rate mortgages are riskier than fixed-rate mortgages, as you are exposed to interest rate fluctuations. If you are on a tight budget, a significant rate hike may put a considerable strain on your finances.
- Difficult to predict payments: With an adjustable-rate mortgage, it can be challenging to budget your monthly payments. As your interest rate changes, so do your mortgage payments.
- Refinancing costs: Refinancing your mortgage can come with fees and charges that can offset any savings you might get from an adjustable-rate mortgage. Make sure to compare the costs of refinancing with different mortgage lenders to ensure that refinancing makes financial sense for you.
Overall, adjustable-rate mortgages can be an attractive option if you plan on selling your home in a few years or if you can handle the risk of higher rates in the future. However, if you plan on staying in your home for a long time, or if you have limited financial flexibility, a fixed-rate mortgage may be a safer option. Ultimately, the decision to refinance your mortgage with an adjustable-rate mortgage should be based on your financial situation, future plans, and risk tolerance.