Consider these 3 questions to determine whether an ARM is right for you.

Many people believe that fixed-rate mortgages are the only option for financing a home, but in some cases an adjustable-rate mortgage (ARM) offers more advantages. Keep reading to learn how ARMs work and when they can be the savvy choice.

How ARMs work

Like traditional mortgages, ARMs are 30-year loans, however as their name implies, the interest rate can fluctuate. ARMs have a set interest rate for an introductory term for five to ten years, typically lower than fixed-rate loans. After the introductory period, the interest rate can be periodically (annually or every six months) adjusted up or down depending on market conditions. For example, if you get a Consumers 10/6 ARM, your interest rate would remain steady for the first ten years; then the rate may be adjusted every six months.

How much an ARM interest rate may be adjusted is specified in the loan contract by cap limits. There could be a cap limit for the initial and subsequent adjustments as well as a lifetime cap. It’s common for lifetime caps of 5% but they can be higher.

If you’re considering whether an ARM is right for you, ask these questions:

1. Do you plan to move within a few years?
2. Do you plan to pay off the mortgage in a few years?
3. Are you comfortable with uncertainty?

If you plan to move or pay off the mortgage within an ARM’s introductory period, you could take full advantage of lower interest rates for five to ten years. Some borrowers choose to apply what they save in interest to repaying the loan to help build equity faster, too.

While it’s possible that interest rates could go down after a loan’s introductory period, many homeowners aren’t comfortable with the possibility of rates that could increase. Or, they don’t like the fact that if they choose to convert the loan to a fixed-rate loan after the introductory period they would incur financing fees that could cost thousands of dollars.

ARMs are powerful financing tools that help many homeowners save thousands in mortgage interest. If you’re considering an ARM, be mindful that terms, rates and caps vary by lender. Consumers Mortgage Loan Officers are here to help you decide which mortgage is right for your situation.

Consumers helps more than 2,000 members finance land, first and second homes, and home improvement projects each year. We’d love to help you with a mortgage or home equity line of credit; contact us online or call us at 800-991-2221.