Why Choose An Adjustable Rate Mortgage?

Fixed rate loans are overwhelmingly more popular than the other mortgage options out there. Freddie Mac reported in the Quarterly Product Transition Report for the first quarter of 2011 that more than 95% of refinance mortgages had a fixed rate.

But there are still borrowers out there electing to purchase or refinance a property with other programs such as an adjustable rate mortgage (or ARM). Is this ever a good idea? Isn't the security of a fixed rate important after we've seen so much turmoil in the real estate and mortgage markets in the past few years?

There are still scenarios in which it makes sense to at least consider a loan such as a 5 year adjustable rate mortgage, 3 year arm, or 7 year arm.

Someone who knows they will only own a home for a couple of years might do well to take advantage of the lower interest rates available on adjustable rate mortgages, rather than pay a higher rate 30 year fixed rate loan only to pay off the mortgage in full in year two or three of the mortgage when the property is sold.

The difference in rate between a 30 Year Fixed mortgage and a 5/1 ARM can be significant. For example, on 6/9/11 CapWest Mortgage advertised a 4.375% note rate (4.591% APR, $1600 in Fees in the APR) for a 30 year fixed rate mortgage and 2.625% (2.820% APR, $1600 in Fees in the APR) for the 5 year adjustable rate loan. (These rates advertised for a Kansas mortgage.) On a $200,000 loan that's a difference in payment of $174.65 per month. Can you think of anything you could do with an extra $174 and change every month? My guess that most of us can!

Of course there is risk associated with taking on an ARM. What if plans change for our hypothetical homeowner and he or she doesn't sell the property? If rates adjust higher at the end of the fixed rate period they could end up paying more each month.

All this isn't to say that there is anything wrong with a good old fixed rate mortgage products - it's extremely popular for a reason. It's just good to know that there are additional options out there and when it might be appropriate to consider them.