With rates so low, should I consider an ARM?

adjustable rate mortgageWith rates at near historical lows, the question often comes up as to whether an Adjustable Rate Mortgage is a good idea. This will depend on a number of factors, the first of which is how long you intend to either occupy, or own the property.

If your short tem plan is to own a property, and you are highly confident that you will be able to sell it at the price that you need to get, then you may want to consider an ARM. The downside to ARMs, and one of the many contributing factors to the mortgage meltdown was the volatility of mortgages whose rates and payments were able to change over time, often drastically.

There are three factors to consider when selecting an Adjustable Rate Mortgage. They are:

  1. How long will the initial rate will remain fixed? Most ARMs have an initial fixed rate, as in three and five years respectively for 3/1 and 5/1 ARMS for example.
  2. The next questions are how often the rate will move, and how much it will be able to move in one adjustment. An example of this would be that the rate could move one time per year and move one percentage point at each adjustment.
  3. What is the maximum rate that the loan could ever have? This is called the ceiling, and is hugely important in that in the span of a few short years you may find that your interest rate has jumped six to eight percent or more. Today, as opposed to during the time of the meltdown, borrowers are required to qualify for ARMS as if they had adjusted upward, causing perhaps less of a payment, shock, but this can still become expensive in a hurry.

If you are considering getting an ARM, the best thing that you can do is to sit down with a piece of paper and a pen, and figure out what your long term strategy is. Even the best laid plans are subject to change over time, and your understanding of how ARMS work will allow you to use them to your advantage.