The benefit of an Adjustable Rate Mortgage is very simply in the money you can save due to the lower interest rates offered with these mortgage products. That’s not to say that there aren’t risks involved with an ARM as there are many varieties of ARMs with varying degrees of risk. However, an appropriate ARM for an appropriate borrower will balance that risk to an acceptable level and still provide a nice financial reward.
By way of example, here is my own experience with the savings produced by selecting an ARM. My current mortgage is a 7-year ARM and I am 6+ years into it (74 months actually). 
At the time that I took out this mortgage, the prevailing rate for a 30-year fixed rate loan was about 5.0%. By taking the Adjustable Rate Mortgage, I was able to get a rate of 4.125% (with no points) and I originally mortgaged $217,000. Now, all the necessary figures have been provided to generate the comparison below.
| 30-year fixed rate at 5.0% |
7-year ARM at 3.75% |
Difference | |
| Monthly Payment | $1,164.90 | $1,051.69 | -$113.21 |
| Total payments over 74 months |
$86,202.60 | $77,825.06 | -$8,377.54 |
| Principal paid off over 74 months |
$22,545.32 | $25,713.70 | $3,168.38 |
As I am about to refinance and payoff this current mortgage, I look back happily on my decision to use an Adjustable Rate Mortgage as it saved me $8,378 in payments to date. I also have to factor in that, even with the lower monthly payments, the ARM actually paid off $3,168 more in principal than the fixed rate mortgage would have. That brings my total savings to $11,546. Of course, I’m now in the position 
of refinancing which costs money that I would not have had to pay if I just had a 30-year fixed rate mortgage. Those costs are about $2,200 (Pennsylvania is among the highest in the nation when it comes to title insurance costs). So, I still saved $9,346 by going with the ARM.
As for my new mortgage, I was tempted to go with a 30-year fixed rate this time around. But on a recent dip in mortgage rates, the spread (or difference) between the 30-year fixed rate mortgages and a 5-year ARM was about 1% again. Where I live (in Lansdale PA) I was able to get a 5-year Adjustable Rate Mortgage at and attractive 3.75%. My plan is to keep the same payment as my current mortgage with the difference being applied to pay down the principal more quickly.
This is just one illustration of how using the correct Adjustable Rate Mortgage can save a significant amount of money for the borrower. There are certain scenarios and certain borrowers for which an ARM is not the right mortgage product. Conversely, I often see buyers considering a 30-year fixed rate mortgage when it absolutely makes more sense for them to use an ARM (i.e. a buyer who knows they’re only going to be in the home for a few years).
The bottom line is that a borrower should really educate themselves about the different mortgage products available and carefully weigh the risks and rewards of each one. Rates for 30-year fixed mortgages are very attractive right now, but you could literally and unnecessarily be giving away thousands of dollars to the bank by only considering this type of mortgage.
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Contact Scott Loper, Associate Broker, Realtor®, RE/MAX Realty Group at 215-513-1333 for help buying or selling a home in Lansdale, Harleysville, Hatfield, Souderton, Skippack, Collegeville, North Wales and the surrounding areas of Montgomery County Pennsylvania. To Search for Homes For Sale in Montgomery County Click Here.
Copyright © 2009, The Scott Loper Team, All rights reserved. The Benefit of an Adjustable Rate Mortgage.
The Scott Loper Team
Scott Loper - Associate Broker
Lisa Loper - Sales Associate
RE/MAX Realty Group
439 Main Street
Harleysville, PA 19438
Ph: 215-256-1200 x-213
It is my understanding that very few ARMS are being written these days since we have historic 30 year fixed rate financing.
Ellen,
I'm sure that's been true for most of the year. For the first half of the year, there was very little spread between the ARMs and the 30-year fixed rate and thus no incentive for a borrower to take the risk. There were even times over the summer that the ARM rates were higher than the 30-year. Recently however, some ARM rates have dropped well below the 30-year rates to the point where I believe a prudent borrower has to at least consider the ARMs. In my own refinancing experience, the 5-year ARM was about 1% lower than the 30-year which compelled me to take that option.
Thanks for the comment.
-Scott
I always hate to see people invest their last penny into real estate since real estate is not liquid. I've seen too many emergencies come about with no cash to pay for them.
Jim,
I agree that borrowers should be careful not to get financially overextended. I also understand that many borrowers got in trouble by using risky ARMs to buy homes than they wouldn't otherwise qualify for and really couldn't afford. That's why I believe there are appropriate ARMs for appropriate borrowers. Not every ARM is for every borrower and certain ARMs probably should have been avoided by the majority of borrowers. But again, for an appropriate borrower, the careful selection of an ARM can save him/her thousands of dollars.
- Scott