QandAs: Loans

What are the cons of an Adjustable Rate Mortgage?

Answer:
While many people find adjustable rate mortgage (ARM) loans

to be a good option for home ownership, there is certainly an element of risk with associated with these types of loans. Even though your initial interest rate and monthly payment may be low, that can change drastically when it's time for your interest rate to adjust.

With and ARM loan, interest rates are subject to increase or decrease based on economic conditions at periodic intervals per the terms of the loan. What many people don't realize is that an interest rate adjustment of just a few percentage points can mean a significant increase in their monthly payments. When your rate adjusts, you are responsible for the new payment no matter how great the increase is.

Many people plan to sell their home or refinance it before the first interest rate adjusts. However, it may not always be possible to do so. The real estate market is a volatile one, and it can often take longer than expected to sell a home. There are no guarantees when it comes to refinancing either. Interest rates may be much higher when you try to refinance than they were when you purchased your home initially, making it difficult or impossible for you to qualify for an affordable loan.


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