Many would-be homebuyers have heard horror stories about adjustable-rate mortgages, so they refuse to even consider them. However, there are situations where opting for an adjustable-rate mortgage offers real advantages. If you want to feel confident that you’re getting your best mortgage, don’t assume. Explore the pros and cons of adjustable-rate mortgages so that you can make an informed decision about which form of financing best fits your situation.
The Pros and Cons of Adjustable-Rate Mortgages
What is an adjustable-rate mortgage? As The Balance explains, it’s a home loan with a variable interest rate. With a fixed-rate mortgage, you know from the start what your interest rate will be for the entire life of the loan. Adjustable-rate mortgages are less consistent. They typically begin with an enticingly low interest rate. After a set period of time, the interest rate changes periodically, climbing and sinking along with the movements of the marketplace. Adjustable-rate mortgages are often seen as riskier than fixed-rate mortgages because they’re more unpredictable.
The Pros of Adjustable-Rate Mortgages
What advantages make an adjustable-rate mortgage appealing? According to Debt.org, there are a few benefits that consistently catch the eyes of borrowers:
- Adjustable-rate mortgages typically offer low initial rates. Because the borrower assumes a bigger chunk of the risk when using an adjustable-rate loan, lenders generally offer them lower interest rates during the loan’s early years. This allows you to start your journey as a homeowner with a lower mortgage payment.
- You may be able to qualify for a larger loan. Before approving your loan, your lender looks at your capacity to meet your debts, including your new mortgage. Because your initial monthly payment is lower with an adjustable-rate loan, you may be able to secure a bigger loan.
- Your monthly mortgage payment could drop. Borrowers with fixed-rate mortgages have to refinance to capitalize on falling interest rates. With an adjustable-rate mortgage, you don’t have to jump through any hoops. If interest rates drop, your payment does too.
The Cons of Adjustable-Rate Mortgages
Considering the many potential advantages, why are people wary of adjustable-rate mortgages? As NerdWallet indicates, this form of financing can come with some significant drawbacks as well:
- Your monthly mortgage payments could increase. Your payment drops if interest rates do. Unfortunately, the reverse is also true. Your payment will likely increase if interest rates rise. You need to know how much your payments could potentially increase, the impact on your loan’s delicate balance of interest and principal, and whether your finances can handle the strain.
- Adjustable-rate mortgages are more complicated. Adjustable-rate mortgages have complex structures, rules, and fees. Borrowers who don’t fully understand what they’re agreeing to could find themselves in trouble.
- Using an adjustable-rate mortgage increases your risk. With any mortgage, failure to meet your payment obligations can result in the loss of your home. Adjustable-rate mortgages are seen as riskier because they are more unpredictable, so it’s more difficult to have a solid plan for covering your mortgage payments.
Is an Adjustable-Rate Mortgage a Good Choice?
While many homebuyers prefer the security of a fixed rate, there are times when an adjustable-rate loan makes sense. According to Investopedia, adjustable-rate mortgages can be a wise choice for homebuyers planning for a short-term stay, borrowers who are expecting their income to increase dramatically in the next few years, and people who plan to pay off or refinance their home before the higher interest rate is scheduled to kick in.
Would you like to delve deeper into the pros and cons of adjustable-rate mortgages? Contact PrimeLending of Wichita, Kansas, today to learn more. We offer an extensive selection of loan products, and we’ll use our expertise to identify your best options, help you explore the possibilities, and guide you through the entire loan process. Contact us today to start your journey toward homeownership.