Is an adjustable rate loan wise to take for anyone? Why?

An adjustable rate loan can result in a lower payment in the short term but carries a risk that the rate could rise during the long term and produce significantly higher payments. If you do not expect to keep the loan for a long time, then a adjustable rate may be the better choice. In addition, a adjustable rate loan may allow you to borrow a larger amount of money if your credit is less than perfect.

As with all loans depending on your specific needs this product may be optimal choice. We have dealt with the following scenarios in which the Adjustable Rate Mortgage was the prudent choice:

  • Borrower was going to relocate within 5 years.
  • Borrower was going to start a family and upgrade to a bigger home within 5 years.
  • Borrower is expecting a Lump Sum Payment in the short term and will be paying off the loan early.
  • Investor flipping the home and needed the money only on a short term basis.

The adjustable rate mortgage was the prudent choice in the above scenarios because these scenarios did not warrant the security of the fixed rate loan nor the premiums that would be paid to get a fixed rate loan. These borrowers enjoyed the savings of a lower interest rate because of their short term objectives with their home. Once the borrower’s objectives changes and became more permanent, the Fixed Rate Loan would likely be the right choice.