Is an ARM the right loan for me?

Deciding if an Adjustable Rate Mortgage (ARM) is right for you will depend on your personal financial situation. Once your financial goals are decided then the terms of the ARM will also come into play with your decision.

One of the most important things to think about when considering an ARM on your property revolves around how long you plan to keep the home. It's common now for homeowners to not plan to keep the home for more than 3-5 years. If this applies to you, taking a 3-year or 5-year ARM can significantly lower the interest rate on your home, saving you money each month over the typical 30-year fixed program.

Keep in mind that you will have to pay closing costs if you'd like to refinance that ARM into a fixed rate mortgage. If you originally bought the home with little or no money down, you may not have enough equity in your home to include the closing costs when it comes time to refinance.

It is important to compare the rates on the different types of ARM's regardless of how long you plan to be in the home. For example even if you are planning to move in 3 years, you may be able to get a better rate on a 5 year ARM than a 3 year ARM.

The advantage of an Adjustable Rate Mortgage (ARM) is that in most cases it offers a lower interest rate than its Fixed Rate counterpart. However, in some economic climates where the shorter interest rates are not lower than long term rates, such advantage is wiped out, and getting an ARM actually offers no benefits.

How tolerant are you to risk? Fixed rate mortgages offer security because the payment does not adjust, but this peace of mind comes at a cost: fixed rate mortgages often carry a higher interest rate than an adjustable rate mortgage. If you are confident that you know how long you will be in your home, or if you like the idea of increased cash flow due to a lower mortgage interest rate, be sure to ask your mortgage broker if an adjustable rate mortgage makes sense for you.

ARM / Adjustable Rate Mortgage loans which are reaching the end of their fixed period may present a substantial risk to borrowers who don't like the idea of their payments increasing by as much as 25% or more. Because many of the Adjustable Rate Mortgages from the last several years have very high "initial adjustment caps", borrowers can see their rates jump by as much as 6%, which in many cases can more than double your mortgage payment. Refinancing the adjustable ARM mortgage into a fixed rate mortgage eliminates the risk of payments rising over time entirely, and fixed rate mortgages are priced at very affordable rates compared with ARM mortgages today.

If you are in a starter home and plan on moving within 5 years, an ARM Loan may be your best bet. You can enjoy the savings while in the property and sell before ever having an adjustment in rate.

An Adjustable Rate Mortgage (ARM) can be a great loan if you do not plan to be in the home very long. Also, if you feel you will be making more money in the future the ARM may be a good loan for you.

If you decide to go with an adjustable rate mortgage, take note of the exact date on which the ARM will adjust. Be sure to contact a mortgage loan specialist a few months before this date, so the two of you can discuss the options available to you regarding a fixed rate refinance.

Adjustable rate mortgage loans meet some very legitimate needs for both rich and not so rich. You can control your amortization schedule much easier if you have a flexiable Arm program.

» DISCLAIMER: The information contained in this article on 'Is an ARM the right loan for me?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.