What Is the Best Type of Mortgage?

Find out whether a fixed or adjustable mortgage is right for you.

Laura Adams, MBA,
February 14, 2011
Episode #210

Page 3 of 3

When Should You Get an Adjustable-Rate Mortgage?

Here are five situations when it makes sense to consider getting an adjustable-rate mortgage:

  1. Interest rates are steady or declining.When rates don’t go up, you can expect to have a steady or lower monthly payment.

  2. Your income is rising. If you’re confident that you’ll earn enough to cover the worst-case scenario for adjustable-rate payment increases.

  3. You need a low interest rate to qualify. A low introductory rate means that you usually qualify to borrow more money than with a higher-rate, fixed loan.

  4. You want to save interest. A low introductory rate means you save a lot of interest in the first few years of ownership.

  5. You’ll probably sell or refinance. Getting rid of an ARM during an initial fixed-rateperiod doesn’t put you at risk if interest rates rise. 

How to Choose an Adjustable-Rate Mortgage

Under the right circumstances an adjustable-rate mortgage can save you interest and keep your payments as low as possible. That can free up more of your money for savings and investments. However, an ARM can also lead to big financial problems if you don’t really understand how it works. Many foreclosures were the result of borrowers who mistakenly thought they could afford expensive homes because the initial interest rates were low. As the rates adjusted up they couldn’t afford the increased payments and were stuck with the loan because they couldn’t qualify for a refinance or sell the property.

If you’re considering an ARM, make sure to carefully review the loan’s Good Faith Estimate that tells you how your rate is determined, how often the rate could change, and how much your payments could rise. Ask the lender lots of questions including specific examples about how high your payments could go. If you’re going to stay in the home for a long time, be absolutely sure that you can afford the worst-case scenario for interest rate increases on an adjustable-rate mortgage. If you can’t, it’s smart to buy a less expensive home or to get a fixed-rate mortgage.

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Mortgage image courtesy of Shutterstock