What You Need to Know About 5-1 ARMs

Adjustable rate mortgages can be risky! But, sometimes choosing an adjustable rate mortgage over a fixed mortgage can prove to be a solid economic choice. Still can’t decide? Here are the pros and cons of adjustable rate mortgages:
Pros
• Save a lot of money during the fixed-rate period (if you have a Hybrid ARM).
• Rates are still at a historic all-time low, which means that the changes won’t be dramatic.
• If you’re in the home for less than five years, you will end up saving a lot of money as long as there’s no prepayment penalty.
• Borrower caps will ensure you don’t pay rates that go above a certain amount.
Cons
• Your interest rates can drastically increase after the initial rate period, which means that your monthly payments can also increase. If you don’t account for this potential, you will ultimately end up losing your home to foreclosure.
• If you sell or refinance the home before the first five years of the mortgage, you may have a prepayment penalty.
• If you easily stress about money or are self-employed, you might not want to get an ARM because the interest rates change so much.
• If you decide you want a fixed-rate loan, it’s expensive to refinance into that at a later date.

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