Question:

What are the advantages and disadvantages of adjustable rate mortgage (arm) vs fixed rate mortgage (frm)?

Answer:

The Adjustable Rate Mortgage (ARM) and Fixed Rate Mortgage (FRM) represent the two most common types of amortized loans. The FRM is a loan whose interest rate remains fixed for the whole duration of the mortgage. The interest rate with an ARM will be fixed for a period of one to ten years and then will adjust according to a market index. Very often it will adjust upwards.

FRMs are particularly easier to understand compared to the ARM counterparts. Thus, for first-time home buyers it will be easier to plan their monthly payments ahead of time and they will remain constant until the loan is fully amortized. Also, in case of swelling rates of inflation, borrowers will remain protected. However, property prices may go down substantially and in that case a borrower may have to consider refinancing the loan in order to make use of the falling rates and will have to spend another several thousand dollars in closing costs.

An ARM is remarkably flexible to the customer but is not so easy to grasp for inexperienced home shoppers. Usually an ARM will allow the borrower to buy larger property than they would otherwise. Or an ARM is a cheap way to get a house if they do not expect to stay in for long. Home buyers also benefit from the lower fixed interest for the first several years, depending on the type of ARM. After that entry period, the interest rate may very well go down according to the market indices and borrowers won't need to worry about refinancing costs. Also, those savings from low interest rates may be invested some place else and bring additional income to the borrower.

However, ARMs have clearly spelled disadvantages such as abrupt rise of interest rates in case of stable or booming economy and large annual and lifetime caps. Some ARMs also have a negative amortization option that leaves borrowers owing more than they were initially loaned. An experienced lender may easily lure first-time shoppers into a not so beneficial ARM agreement only because initial payments on ARMs seem so attractive and affordable. The inexperienced borrower is in no way aware of the fact that the artificially lowered rates are compensated by accrual to the principal.

As a whole, FRMs are safer and more predictable to stay with. If you have a trusted lender, or you consider yourself well-versed in mortgaging processes, you may try juggling an ARM.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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