An Adjustable Rate Mortgage Loan, can be a great option for people who plan to be in a home for a certain number of years or plan to pay off their home in a short time.  Many people have been attracted to adjustable rate home loans as a means of being able to afford living in a more expensive home with lower monthly payments. 

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Adjustable Rate Mortgage Loan Defined:

An Adjustable Rate Mortgage Loan (ARM) is defined as a home loan or Deed of Trust which allows the Lender to periodically adjust the interest rate in accordance with a specified financial index.  The main benefit of adjustable rate mortgage loans are the flexibility they offer as far as lowing monthly payments, term and rate. 

More house for less money, sounds great right?  But as our current mortgage crisis has made painfully clear, there are inherent risks associated with adjustable rate home loans – they adjust!  The biggest drawback of an adjustable rate mortgage is referred to as “Payment Shock.”  Every adjustable rate loan has a set period of time where the mortgage rate is fixed, 1, 3 or 5 years are most common.  Once that term expires your rate will adjust according to a financial index plus a number of percentage points.  Rate and payment could increase at this point, at which the borrower could look for mortgage refinancing, or keep paying on the loan they have. 

To further confuse the matter, many adjustable rate mortgage loans give the borrower a choice to pay “interest only” for a given amount of time, which significantly lowers the payment, but never chips away at the balance they owe on the loan.  Once the interest only term expires the borrower will be required to pay both the principal payment, plus interest – in some cases doubling the person’s monthly payment.  Combine a drop in home value, higher interest rates and a higher payment, and it’s pretty easy to understand why so many Americans find themselves facing a foreclosure just a few years after buying their homes.

Adjustable Rate Mortgage Advice

One of the best pieces of advice I’ve ever received is this, “if you can’t afford to pay cash, don’t buy it.”  Of course, this usually isn't possible with a house.  Actually, some debt can be good.  But the point remains-- you shouldn’t use creative financing to buy something you wouldn’t be able to afford otherwise.  If you can afford it, you can actually use these types of home loans to save a significant amount of money. 

Essentially, adjustable rate home loans are recommended for people who are certain they will not be in the home after the fixed term of the loan expires, or will have it paid off by then.  Or by those that can afford an increase in payment, but want to save money by gambling that rates will stay low – and still sleep at night.