Before even getting an adjustable rate mortgage (or ARM), you have to know how it works. You have to see to it that this will be favorable to your current personal as well as financial condition. If not, you will find yourself paying huge amount of dollars without and getting stuck in debt.
First and foremost, ARM is not similar to a fixed rate mortgage (or FRM) in terms of the interest rates applied on them. In an FRM, the rate of interest does not vary no matter what the economic or market condition may be, or how long you intend to pay your loan. The interest is based on what is agreed upon by the creditor and debtor.
On the other hand, an ARM is contradictory to what an FRM is. For a specific period, an ARM will have a fixed and low rate of interest, then after the period lapses, a debtor already has to pay varying and fluctuating rates depending on the market condition. So, if you get an adjustable rate mortgage, you cannot predict how much you will be paying next month or the following months.
In an ARM, you will not be able to budget your income efficiently as you do not exactly know how much will be allocated for your loan. If the amount that you will be required to pay for this month has enormously increased, your budget will surely be ruined.
However, ARM is not at all that bad because it has some advantages. For instance, if you are planning to move to another place and stay there for only three to five years, then the ARM is ideal for you. This is because ARM usually starts with a fixed and low interest rate for a certain period of time, which is at least two to five years. This means that you will be paying low monthly mortgage repayments for this specified period and you will just have to deal with an adjustable interest rate for the remaining years or months, or you do not even have to.
But if you intend to stay for a longer time or even forever in your home, then the FRM is more recommended. When you know what your monthly loan obligation is, you will have an easier time to budget your monthly income. Even when the market condition is unstable and the interest rates are high, it is definite that you will never get affected by these circumstances.