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Interest Rate Fluctuations: Should You Get an Adjustable Rate Mortgage or Fixed?

Interest Rate Fluctuations: Should You Get an Adjustable Rate Mortgage or Fixed?

Interest rates are stable until they’re not. That is to say, the Federal Reserve, aka the Fed, controls monetary policies that are designed to help the economy in various ways. For many years, interest rates were kept low to encourage a wide variety of economic activities including home building and buying. Now the Fed is tinkering with rates in order to keep the economy from overheating and that means the interest rates for mortgages are fluctuating as a result. If you’re buying a home in Philadelphia, you might want to consider getting an adjustable rate mortgage to whether the changes in interest rates.

Look at our past post to see what a change in Interest Rate can mean to your payment.

What is an Adjustable Rate Mortgage?

The simple definition of an adjustable rate mortgage (ARM) is that the interest rate floats with the rate set by the Fed. If the Federal interest rate goes lower during the life of the mortgage, the interest rate on the mortgage goes lower without the need to refinance. However, if the Fed decides to raise interest rates, the mortgage interest will also rise. It is possible to get an ARM that caps the frequency of interest rate changes or maximum interest charged which limits how much a payment changes at any given time. But the payment will change and that’s a guarantee with an ARM.

Taking out an ARM is not without its risks, but the Fed tends to raise interest rates slowly so as to not send shock waves through the economy. It can be years before there’s enough of a significant increase to make an ARM-less attractive. Keep in mind that taking out an ARM is also taking on the risk that interest rates only go up during the life of the mortgage and won’t go back down. Make sure to discuss the pros and cons of an ARM with a Philadelphia mortgage broker to determine if it’s a good product for you.

Are There Advantages to Getting an ARM?

An ARM works best for those who intend on paying off the mortgage as quickly as possible. They’re not recommended for those who need a 30-year mortgage to aid in affordability. The adjustable interest rate is only one of the reasons why they’re not recommended for the long term because ARMs have an introductory period. The introductory period is a defined period of time in which the interest rate will not fluctuate regardless of what the Fed does. And the introductory period can last anywhere from one month to 10 years. You run the risk of getting used to one payment for a long period of time, then get a shock when the introductory period expires.

Another aspect of ARMs is that they can allow you to buy a more expensive house than you would otherwise be able to afford because of the introductory period. But again, you don’t want to get caught out with a mortgage payment that can change significantly from one month to the next because there was a change in interest rates and it’s within the cap. The change in mortgage payment may not be a significant amount, but if you’re working within a budget or are sensitive to money fluctuations, you may not want to deal with the potential for an increase. A Philadelphia mortgage broker can give you advice that’s tailored to your needs and help you decide if a traditional mortgage or ARM is the right choice for you.

All mortgage products have their place and purpose. A majority of home buyers prefer to take out a traditional mortgage in order to have steady monthly payments that match their available income. But there are homebuyers with unusual financial arrangements that can benefit from taking out an ARM. There is no right or wrong mortgage for borrowers, and a Philadelphia mortgage broker can help you get the one that fits your needs best.

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