3 Situations an Adjustable Mortgage Rate Can Be Beneficial

Most of the time an adjustable mortgage rate is considered to be a negative option. Many financial experts conclude that they are a dangerous tool to use, and can work against you in many cases. However, there are situations where they can be used to your advantage. Here are a few situations where an adjustable mortgage rate can be beneficial.

1. When You Plan on Moving

If you know that you're going to be moving in five years or less, then an adjustable rate mortgage might be a good option for you. A popular term for an adjustable rate mortgage is called a 5/1 ARM. The 5/1 ARM means that you get a fixed rate for five years and then the interest rate can change a certain percentage each year after that for another five years. During that initial five year period, the interest rate and the payment will be lower than they are with a 30 year fixed.

Therefore, you can save some money during this five year period versus a regular mortgage. Even if it takes you a year beyond the five year period to sell the house, if the interest rate goes up it can only go up a few percentage points if the market moves. Therefore, the hit wouldn't be that unbearable if it took some time to sell. You would still be benefiting for the entire five year period before that and saving money.

2. When Interest Goes Down

Everyone wants to talk about the dangers of an adjustable rate mortgage. They always refer to the direct possibility that the interest rate will go up after your initial fixed period of interest. However, they fail to mention that the interest rate could go down as well. You've got about a 50/50 chance of it going up or down. In bad economic times, the Fed will often lower the interest rate that it loans money at. Therefore, the interest rate that you pay on your adjustable rate might be better than when you started.

If you have a fixed rate mortgage, you will not be able to take advantage of the low interest unless you refinance. You are locked into a certain rate for 30 years regardless of whether the interest goes down or not. With an adjustable rate mortgage, you can take advantage of down periods in the market.

3. You Plan on Refinancing

If you plan on refinancing your mortgage after the initial fixed interest period, an adjustable rate mortgage can be to your advantage. You can take advantage of the five years of low payments and then refinance it into a fixed mortgage to avoid any variance in your payment.