Adjustable Rate Mortgage Pros and Cons

By Liz Clinger Updated on 7/19/2017

There are many loan options available to choose from to fund your home purchase.  Some loans are fixed rate mortgages, while others come with rates that adjust upward or downward over time.  This latter type of loan is called an adjustable rate mortgage and there are benefits and drawbacks to this mortgage type.

Benefits of an ARM loan

Some of the advantages of the adjustable rate mortgage type are listed here. These benefits enable many home buyers to secure fixed low rates at low costs to finance their homes.

• Low initial mortgage rates for a set period. The lowest mortgage rates available on the market are tied to adjustable rate mortgages.
• You may save money if the market rate decrease in the future, as this will adjust your mortgage rate downward.
• Ceilings, adjustment periods, and rate caps keep mortgage rates bearable over time. It’s a misconception that mortgage rate on adjustable loans always goes higher and higher over the course of the loan. Your lender does not want to force you into foreclosure.
• Offer a cheaper option for borrowers who don't plan on living in one place for very long to buy a house.

Drawbacks of an ARM loan

There are some substantial drawbacks to adjustable rate mortgages. These are listed here.

• Your rate will likely adjust upward, and you’ll have to pay a higher rate than you planned.
• You won’t be able to make financial plans for the future around your mortgage because there’s no way to know where your rate will be in ten years.
• ARMs are difficult to understand. Lenders have much more flexibility when determining margins, caps, adjustment indexes and other things, so unsophisticated borrowers can easily get confused or trapped by shady mortgage companies.

These are the primary drawbacks to the adjustable rate mortgage.  If your rate climbs upward and you’re unable to make your payments, your credit score will be damaged, and you may lose your home.  But if you’re willing to take this risk or you plan to refinance within the next few years, an adjustable rate mortgage can get you a solid low rate on your mortgage.