As fixed mortgage rates begin to climb, home buyers may consider turning to adjustable rate mortgages (ARMs), but these mortgages are best suited for buyers who will occupy their house for a limited amount of time. ARMs are tied to the fluctuations of interest rates, unlike fixed-rate mortgages, which lock in a rate for many years.
ARM rates are currently 1.5 to 2 percentage points lower than the average 30-year-fixed rate. This can translate into hundreds of dollars of savings each year. However, lower initial payments can become a crushing debt burden when interest rates rise.
To avoid this danger, ARMs should be considered by buyers who plan to own their homes for only a relatively short time. If you think you’ll be in a home for more than three years, you may consider a hybrid ARM, which has an initial fixed rate that can last several years. The length of the time for the initial fixed rate should coincide with how long you expect to be in the house.
After the time expires, you will have sold the house and taken a new mortgage, pocketing savings from the ARM’s lower rate. Hybrid mortgages may work especially well for growing families that will need a larger house and that expect future income to grow substantially.