Drawbacks of an Adjustable Rate Mortgage

As with any other type of loan, there are a few cons to using an ARM:

• An ARM is riskier than a fixed rate mortgage because the monthly payment can change considerably. You don’t have any control of the changes in the monthly payments.
• If interest rates increase significantly, you may have a hard time making your monthly payments.
• ARMs could cost a borrower more over the life of the loan than a fixed rate mortgage
• ARMs are a little harder to understand for an inexperienced borrower, making it easier for an unethical lender to take advantage of the borrower.
• A borrower's initial low rate will adjust to a level higher than the going fixed rate level in almost every case because ARMs have initial fixed rates that are set artificially low.

ARMs are usually not a good choice when you are thinking of staying in your new home for a long period of time or if the macro-economical indexes are forecast to raise during the next few months or years.