One type of home loan available to borrowers is the adjustable rate mortgage (ARM), in which the rate changes based on the market interest rates. An ARM will adjust on a specific schedule after the initial fixed period. The type of ARM the borrower chooses determines this schedule, and the initial interest rate of an ARM can be significantly lower than what’s offered with a traditional fixed rate mortgage. The following will help you determine when an ARM is right for you.

1. Lower mortgage rate

An ARM might be appropriate if you’re purchasing a home and want a lower monthly mortgage payment early on. Since it has an initial period during which the rate won’t change, the interest savings can help you purchase items for your new home or make home improvements. Though the mortgage payment can change, or adjust, periodically, rate caps limit how much your rate can increase when it is time to adjust and over the life of the loan.

At ditech, you can choose among these three adjustable rate mortgages options:

• 5 years
• 7 years
• 10 years

2. Keeping the mortgage for only a short period

If you don’t plan to settle in the home for a long time, it could make sense to use an ARM for financing since the initial rate won’t increase for a period of years. For example, if you plan on moving in three years, a five year adjustable rate mortgage will give you a lower rate that won’t adjust while you own the home. An ARM can be a useful financial tool for borrowers who have temporary job relocations.

3. Lower initial monthly payments

During the fixed rate period of your ARM, you’ll be paying less out of pocket than you would with a traditional loan. This initial 5, 7, or 10 year period will allow you to pay less in principal and interest. Some ARMs will allow you to pay your loan off early without imposing prepayment penalties.

4. Expecting a lifestyle change

An ARM may be right for you if you anticipate an increase in income in the future. In this situation, you may feel comfortable with saving money now with a lower monthly payment, but content with the prospect of making higher payments down the line when your ARM adjusts but your income does too.

5. ARMs can adjust down

While some borrowers stay away from ARMs because the rate can increase, others like ARMs because the rate can also decrease, resulting in a lower payment for you.

While adjustable rate mortgages can be risky, they can a great tool for the right buyer in the right circumstance. If you're a borrower who is financially stable and understands the benefits and risks associated with an adjustable rate mortgage, then using an ARM can be a smart financial strategy.

If you’re thinking of becoming a homeowner, a ditech Home Loan Specialist can help you determine if an ARM is right for your situation. Find a Home Loan Specialist now.

Learn more about our home financing options today

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