Although your mortgage lender may encourage a fixed rate mortgage, there are sound reasons to consider an adjustable rate mortgage. An adjustable rate mortgage has an interest rate that fluctuates according to market trends. As part of the deal, you receive an initial low fixed rate for a period of about 3 to 5 years. But after the initial rate period, your rate will adjust on a yearly basis, either increasing or decreasing. An adjustable rate mortgage can be risky, but there are good reasons to consider this type of loan.
The interest rate on an adjustable rate mortgage is typically lower than the rate on a fixed rate mortgage. For this matter, an adjustable rate might be attractive if you want the lowest rate possible and the lowest possible mortgage payment. Understand, however, that the fixed rate is only guaranteed for a certain number of years.
If you anticipate earning a higher salary in the next 3 to 5 years, an adjustable rate mortgage is a feasible option. A higher interest rate after your first rate adjustment will trigger a higher monthly payment. But if your new salary can support the higher payment, you’re less likely to deal with payment shock and financial hardships.
If you're buying a short-term investment property — perhaps a fixer upper — it makes sense to get an adjustable rate mortgage. In all likelihood, you will fix up the property and resell it within the next year. You can enjoy a low rate now, and then unload the house before any rate adjustments take place.
If you're buying a primary residence, but you plan to only live in the house for a few years, an adjustable rate mortgage can work. You can enjoy a fixed rate for the first few years, and then sell before your first scheduled rate adjustment.
A lower credit score results in a higher mortgage rate. If your score needs some work, taking a chance with an adjustable rate mortgage might provide the savings you need. However, this approach is only beneficial if you’re working to improve your credit score. Thus, you can refinance to a fixed rate mortgage before your rate adjustment.
With home prices in your area steadily increasing, an adjustable rate mortgage might be the only way to afford a house. Acquiring a lower rate increases purchasing power, helping you snag an affordable payment. Just make sure you're able to afford the mortgage payment if your rate increases in the future.
There is no way to predict mortgage rates. But if you strongly believe that rates will remain relatively low, an adjustable rate might be worth the risk. Still, you need a backup plan – just in case rates dramatically increase. For example, you might think of refinancing to a fixed rate as rates start to climb, or you could sell your home to avoid a larger payment.
An adjustable rate mortgage is a dangerous move, but the financial benefits might outweigh the risks — if everything goes according to plan. Do you think adjustable rate mortgages are safe?