For the majority of homebuyers, a fixed-rate mortgage is a better option than an adjustable-rate mortgage, or ARM. However, there are some situations when the adjustable-rate option could make good financial sense. Here are three situations where an ARM might be the right mortgage for you.
You don’t plan on owning the property long
An adjustable-rate mortgage can be a smart idea if you’re virtually certain that you won’t own the house beyond the introductory rate period. In other words, if you’re sure that you’ll move in four years, a 5/1 ARM can be a good move for you.
As an example, I had a friend in college who bought a condo because doing was cheaper than paying rent. He knew that he wanted to move to New York after graduation in three years, so he used an ARM to finance the condo in order to keep his payments low.
All other factors being equal, an adjustable-rate mortgage tends to have a significantly lower interest rate than a corresponding fixed-rate loan. As of April 25, 2018, the average APR on a 30-year fixed-rate mortgage is 4.73%, while the average APR on a 5/1 adjustable-rate mortgage is just 4.1%. On a $200,000 mortgage, this is the difference between monthly principal and interest payments of $1,041 and $966 — a significant savings.
You have reason to believe your credit will improve
Another valid reason for considering an adjustable-rate mortgage is if you have so-so credit now, but believe…