ARM Loan Rate vs. Fixed: Should You Convert?

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When comparing an ARM loan rate to that of a fixed mortgage, you will almost always receive a lower interest rate upfront. An adjustable rate mortgage is designed to have a low introductory rate and then be a variable interest rate after that. For many homeowners, these loans allow them to afford the house that they've always wanted. However, they may run into problems down the road. If you signed up for an adjustable rate mortgage, you might want to look at converting your mortgage to a fixed rate. Here are a few things to consider on each type of mortgage.

After the Promotional Period
If you are still in the introductory period of your adjustable rate mortgage, then life is good. You are probably enjoying a lower rate than all of your friends with fixed rate mortgages on their houses. When you chose your loan, you signed up for an ARM that stays fixed for a certain amount of years and then becomes variable. If you chose a 5/1 ARM, then your rate is fixed for five years. Therefore, during that first five years, your payment is lower and everything is good. However, after the five years is up, things can get tricky.

If the market interest rate goes up that year, so will your payment. Depending on the program, it could go up a few percentage points each year for several years. By the time it's done moving, your payment could have doubled. If you can barely afford the house payment now, there is no way you can afford a house payment that is doubled. 

Betting on the interest rate to stay the same or go down is a risk that many people can not afford to take. It's basically like gambling on your financial future. In this case, it might be to your advantage to look at a fixed mortgage.

Fixed Mortgages
Getting a fixed mortgage is never really a bad idea. It will probably cost you a few more dollars per month during the first few years of your mortgage. However, if you are locked in for 30 years, you know exactly what your payment will be. There will be no surprises that cause you to lose your house five or six years from now. This means that you can rest assured that no matter what happens in the marketplace, your house payment will always be the same.

When ARM's are a Good Idea
Although fixed rate mortgages are safer, there are times when an ARM can be a good idea. If you plan on selling your house within five years, then an ARM is not a bad idea. You will have a fixed rate for those five years and when the rate is scheduled to change, you will sell the house. If you plan on using this strategy, you'll want to make sure that you live in a house that can easily be sold. The last thing you want to do is burden yourself with a house that won't sell and an adjustable rate mortgage.