Adjustable Rate Mortgages
The traditional mortgage - the one your parents probably had - was simple: fixed rate of interest over 30 years. Since the rate was fixed, it was predictable. If interest rates came down enough, the mortgage could be refinanced at a lower rate along with some fees.
It was pretty simple.
An adjustable rate mortgage (ARM) is more complex but more flexible. The rate is not fixed for the entire time of the loan. The rate goes up or down (adjusts) depending on some external interest rate in the market.
The rate for an AMR is usually lower at the beginning, which helps close the deal. Then after that initial period, it adjusts depending on the market. Some ARM's have rate caps that limit how much the rate can rise during a certain period.
You can probably see the risks. If you get into a mortgage based on a low interest rate, will you be able to sustain the payments if the interest rate goes up significantly?
If you plan to stay in the house only a short time, then an ARM might be feasible.
But if you are staying over the long term, then the choice is between an easy start with unknown costs, or a higher fixed cost with no change.
Inflation means that future mortgage payments will be repaid with dollars of less value - so in that sense mortgage payments in 20-30 years could actually cost less in a fixed term mortgage.
It really is a personal decision. For most people the stability of having a fixed payment and no question of increase provides an emotional stability which may not be calculable in dollar terms. Having a place to stay with no question about whether the costs will increase seems a safer bet for most people.
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