Adjustable Rate Vs Fixed Rate Mortgage
It is often a challenging decision to make, which mortgage plan one should go for? Many borrowers stuck in between ARM and FRM plan. Actually, the decision of choosing a mortgage type depends on multiple factors. Some of these are current market conditions, the age of your family, your attitude toward risk and how long you plan to stay in the house.
Let's analyze each of the above mentioned factors one by one.
Market Condition
The inflation often hikes the interest rates. The word inflation describes a persistent, substantial rise in the general level of prices due to an increase in the volume of money and resulting in the loss of value of currency. Choosing an ARM in that case may be beneficial as with the appreciation in value of money the Interest Rate may fall down. You should be aware of the fact that your interest rate will not vary more than 1% up or down in a year and not more or less than 5% for the entire loan life. FRM does not affect your interest rate, whatever the market situation is. Hence, it is advisable to consider the prevalent market condition before choosing your mortgage type.
Age of your Family
Who all are in your family and what are their ages? If you are unable to repay the loan in your life time, your family has to. If you are too old with no dependents go for ARM, as in that case you will have to pay less interest. ARM is always offered at cheaper rate of interest than that in FRM. Spend a little time to decide what would be the future condition of your family and act accordingly.
Your Attitude Towards Risk
Are you dynamic enough to take risks? Ask yourself as ARM is subject to variations and it may happen that you have to repay at higher interest rates. The rate may go high up to 5%. The fear of paying higher interest rate may keep you worried. But if you are able to cope with such situations then don't mind going for ARM. On the contrary, if you can not withstand sudden upswing in your interest rates then choose FRM. It remains constant for the entire Loan Term.
Duration of your Stay
For how long you are going to stay in the house against which you are seeking mortgage. If the length of stay is too short say 5-6 years it is wise to go for ARM, assuming there will be no significant changes in interest rate for this period. But if you are going to stay for longer period like 30 years or lifetime, other above mentioned factors must be considered before choosing your mortgage plan.
There is no rule of thumb in advising for ARM or FRM plan. It depends on your conditions and various other market factors. Follow the guidelines mentioned above; spend some time in analyzing your situation and go for the best. A careful analysis will help you to save 1000s of dollars.