If Not Planning a ‘Forever’ Home Purchase, ARM Loan Could Prove the Right Move
As opposed to a fixed-rate mortgage, where the interest rate never changes, an adjustable-rate-mortgage or ARM loan has an interest rate that can go up or down. Because neither the borrower nor the lender can predict the movement of interest rates, the lender rewards the borrower with an initial interest rate lower than a fixed-rate loan.
ARM loans may appeal to buyers who anticipate moving before the initial rate period expires, thus bypassing the adjustment to a higher interest rate. ARM loans might also make sense in a high interest rate environment, because if rates start to decline, ARM borrowers will likely see their payments automatically lowered, without having to refinance. Although paying an initial lower interest rate can result in savings that could be invested or put toward the purchase of a more expensive house, borrowers need to compare this strategy against their ability to accommodate a potentially larger payment should interest rates rise.