Applying for a mortgage is a big deal. Not only does it signify the purchase of a home, but it’ll also affect your finances well into the future. With this in mind, it’s critical to choose the right type of mortgage.
An adjustable rate mortgage isn’t the right choice for every homebuyer, but understanding the pros and cons will allow you to determine if it’s something to learn more about. Let’s start with an overview of the benefits:
- Lower interest rate: While not always the case, an adjustable rate mortgage generally has a lower interest rate than a fixed-rate mortgage. And as you probably know, the interest rate you secure will greatly impact your monthly payment and how much you pay over the life of the loan.
- Your interest rate may decrease: There’s no way of knowing what will happen in the future, but there’s a possibility that your rate could decrease. And if that happens, your monthly payment will follow
- The opportunity to pay more toward principal: The lower your interest rate, the more money you can contribute to paying down the balance of your loan. This allows you to speed up the rate at which you pay off your loan.
While those are some serious benefits that could work in your favor in a variety of ways, don’t overlook the potential drawbacks of an adjustable rate mortgage. These include the following:
- Your interest rate could rise: Just as your rate could fall, it could also go in the other direction. If that happens, your monthly payment will also increase.
- Uncertainty: Without a fixed rate, you never know what your payment could be in the future. You hope that it goes down, but there’s no guarantee.
- A rising rate could catch you off guard: For instance, you may be able to comfortably afford your current mortgage payment. However, if the rate goes up at the same time that you lose your job, it could put even more stress on your finances.
You shouldn’t let these drawbacks stop you from learning more about an adjustable rate mortgage. Instead, use them to your advantage as you attempt to make an informed decision as to what’s best for you and your financial circumstances.
Don’t rush the process of choosing the right type of mortgage product. Compare the pros and cons of an adjustable rate mortgage and fixed-rate mortgage. And don’t forget to consult with an experienced loan officer or mortgage broker if you have questions or concerns.
Do you have any experience with an adjustable rate mortgage? Were you happy with your decision or did you refinance the first chance you got?