Should I Get An Adjustable Rate Mortgage
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    Buying a home is confusing enough. You may be presented with the option of a Fixed Rate Mortgage or an Adjustable Rate Mortgage. Learn when or wh… Read More
    Buying a home is confusing enough. You may be presented with the option of a Fixed Rate Mortgage or an Adjustable Rate Mortgage. Learn when or when not to get an adjustable rate mortgage. Read Less
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Should I Get an Adjustable Rate Mortgage or a Fixed Rate Mortgage
When it comes time to buy a home most people secure a mortgage to be able to purchase a home.  When I am working with a buyer as a Massachusetts Buyers Agent I am often asked by home buyers Should I get an Adjustable Rate Mortgage or a Fixed Rate Mortgage.

The attraction of a lower monthly mortgage will make many home buyers pause and consider an adjustable rate mortgage.

Definition of Adjustable and Fixed Rate Mortgage

Fixed Rate Mortgage- A mortgage that has a fixed rate for the entire life of the loan.  The benefit is the repayment of the principal and interest will never change.  The most common term of a mortgage is 30 years.  So, for 30 years the interest will always remain the same.

Adjustable Rate Mortgage- Referred to as an ARM. In its simplest terms and adjustable rate mortgage can change over the life of a loan.  The advantages can be a lower monthly payment sometimes saving hundreds of dollars over a fixed rate loan.  The loan terms will fix the rate for X (usually 3,5 or 7 years) amount of years and can be adjusted yearly based upon a stated index like the Libor Index.  As the Libor rises or falls so will your interest rate on a yearly basis after your initial fixed period.

Why is An Adjustable Mortgage Rate Lower?


Did you ever hear the term the greater the risk the greater the reward?  Well that is what is happening.

Banks are willing to offer a lower interest rate on an adjustable rate mortgage because you are willing to take a risk on interest rates along with the bank.  You, the borrower, are not locking in a rate for 30 years and you are willing to risk an interest rate rising after the initial fixed period. 

Let’s compare rates on an adjustable rate mortgage and a fixed rate mortgage today.  Real quick, I looked at one site offering rates the 30 year fixed was 3.93% and the 5/1 adjustable rate mortgage was 3.13%. 

On a loan of $350,000 the principal and interest payment at 3.93% would be $1656.86.  For an adjustable rate mortgage the payment would be $1500.27 a month. A savings of $156.59 a month or $1879.08 a year!!

Other Points to Know About and Adjustable Rate Mortgage

Adjustable rate mortgages are a little more complex as there are several moving parts. Here are the key points. Let’s look at a 5/1 ARM.  The 5 means the loan will be fixed for 5 years and the loan will be adjusted every year after the fixed period.
Current Index Rate- This is the index rate that is used to determine your interest rate. The LIBOR index is one of the more frequently used.

Margin-  An interest rate that is subtracted or added to the index to determine your adjustment.  This is fixed for the life of your loan. Typically somewhere in the 2-2.25% range.
Rate Adjustment Period- This is how frequently your rate will adjust. Usually every year after the initial period. In the 5/1 ARM the 1 is the adjustment period, meaning every year after the initial period.
First Adjustment Interest Rate Cap- The first adjustment period is capped so it can go up no more than X percent the first period.  Typically around 2%.
Subsequent Adjusted Interest Rate- After the first adjustment on the 6th and subsequent years the loan can only be adjusted X percent a year, again, typically around 2%.
Lifetime Cap- The most that can be charged above the initial interest rate over the life of a loan. Usually around 5 or 6%.

In the above example, of a 5/1 ARM at 3.13% your first adjustment period could be as high as 5.13 percent bringing your principal and interest payment on year 6 to $1906.78 with a maximum payment as high as $2848.98 if the cap rate is 6%.

It is important to understand the risks you are taking.  Make sure you understand the fine details of the terms of a loan.

So Should I Get An Adjustable Rate Mortgage

Like everything, the answer is personal to the individual. 

Certainly, the thought of saving $1879 a year is enticing.  Who doesn't want to save that kind of money on their mortgage? 

Face it, you are considering an adjustable rate mortgage to save money!!  Before you go any farther you should read an article by Bill Gassett a Hopkinton MA Realtor about How to Get The Best Interest Rates.  Packed full of information on how to get the best possible interest rate you can on your mortgage, including a traditional 30 year fixed mortgage.

Now to answer the question, should I get an adjustable rate mortgage?  My initial reaction is probably not! 

There are right reasons to get an adjustable rate mortgage and there are wrong reasons to get an adjustable rate mortgage.


Two wrong reason why people consider an adjustable rate mortgage.

1- You are strapped on cash and that $1880 a year savings is calling your name.  Don’t forget that is for only a small period.  Think about the worst case of adding an additional 1200 a month to your payment.
2- To qualify for more money.  If you are running your ratios tight and you can squeak out an extra 30k in a mortgage by going with a fixed rate mortgage.

No, No, No don't do it.  This is where so many people got into trouble with the last housing crisis.  The banks were pushing adjustable rate mortgages.  This is all well and good when homes are appreciating quickly and it is easy to refinance, but there is never any guarantee.

What Are The Right Reasons To Consider an Adjustable Rate Mortgage?

There may be several occasions when you might want to consider an adjustable rate mortgage.

1- If you know you will own the house for less than the fixed rate period.  This may seem strange, but I do run into many corporate executives who are quite transient and know they will only be in the area for a few short years and prefer to own.
2- If you are confident the interest rate will be going down for an extended period of time.  Right now, interest rates are so low, they can’t go much lower!!
3- You know in a short period your income will be rising quickly.  A perfect example is a doctor in residency who knows they will stay in the area.  An ARM might allow the resident to buy more of a house that will suit his needs longer knowing if push comes to shove he can handle any payment fluctuations.

Final Thoughts

The decision is yours and a mortgage broker may present you with the option.  You need to be aware of the fine details of an Adjustable Rate Mortgage to make the proper decision.

At the end of the day, if you ask me should I get an adjustable rate mortgage? I will probably help you conclude no.

Don’t be enticed by the initial savings without thinking it all the way through.  As I said earlier in the article with greater risk comes greater rewards.  But with risk there is always a chance of being caught on the downside.
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This article, Should I Get an Adjustable Rate Mortgage or a Fixed Rate Mortgage? Was written by Kevin Vitali a real estate agent in Tewksbury Massachusetts.  I can be reached at 978-360-0422 or by email at kevin@kevinvitali.com.

Real Estate Services in the following areas: Northeast Massachusetts, Merrimack Valley, North Shore and Metrowest including the following communities and the surrounding area- Amesbury, Andover, Billerica, Burlington, Chelmsford, Dracut, Groveland, Haverhill, Lowell, Melrose, Merrimac, Methuen, Middleton, North Andover, North Reading, Reading, Stoneham Tewksbury, Tyngsborough, Wakefield, Wilmington, Westford