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Adjustable-rate mortgages (ARMs) are a popular option for Wisconsin homebuyers interested in flexible loan terms. Indeed, in recent months ARMs have been growing in popularity. This article will provide a comprehensive overview of ARMs, including their advantages and disadvantages. Whether you're a first-time homebuyer or considering refinancing, understanding the ins and outs of ARMs can help you make a better-informed decision.


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Adjustable-Rate Mortgages: What are they?

An adjustable-rate mortgage, also known as a variable rate mortgage, is a loan where the interest rate is not fixed and can fluctuate over time. The initial interest rate is typically lower than that of a fixed-rate mortgage, making ARMs an attractive option for borrowers looking to take advantage of lower rates during the initial loan period.

The Pros of Adjustable-Rate Mortgage

1. Lower initial rates

One of the key advantages of ARMs is the lower initial interest rate. This can result in lower monthly payments compared to a fixed-rate mortgage, which allows borrowers to allocate their funds toward other expenses or savings

2. Potential for future savings

While the initial rate of an ARM is lower, it's important to consider the potential for future savings. If interest rates decrease or remain stable, borrowers with ARMs can benefit from lower rates during subsequent adjustment periods, leading to reduced mortgage payments over time.

3. Shorter adjustment periods

Unlike fixed-rate mortgages, which typically have a loan term of 15 or 30 years, ARMs often come with shorter adjustment periods. For example, a 5/1 ARM has a fixed rate for the first five years and then adjusts annually thereafter. This can benefit borrowers who plan to sell their home or refinance before the adjustment period begins.

4. Flexibility for short-term homeowners

Adjustable-rate mortgages can benefit people who expect to live in a property for a shorter period. If you plan to move or sell your home before the initial fixed-rate period ends, an ARM can provide you with a lower interest rate during your ownership.

5. Potential for lower lifetime interest payments

If you expect your income to increase significantly in the future, an ARM could work in your favor. With a higher income, you can make larger payments and potentially pay off your mortgage faster, resulting in lower overall interest payments over the life of the loan.

6. Refinancing opportunities

Adjustable-rate mortgages also offer opportunities for refinancing. If interest rates decrease significantly, you can refinance your ARM into a fixed-rate mortgage, securing a lower interest rate and stable payments for the remainder of your loan term.

The cons of adjustable-rate mortgages 

1. Uncertainty in future payments


The primary disadvantage of adjustable-rate mortgages is the uncertainty of future payments. As the interest rate can fluctuate, your monthly mortgage payments might increase significantly. This can make budgeting more challenging. It's important to consider your financial stability and ability to absorb potential payment increases before choosing an ARM.

2. Interest rate volatility

Adjustable-rate mortgages are susceptible to interest rate volatility. If interest rates rise during the adjustment periods, your monthly payments can increase substantially. This can lead to financial strain and could result in difficulty paying your mortgage.

3. Difficulties with budgeting


When, or if, the economy is experiencing interest rate volatility, budgeting for an ARM can get complicated. Imagine trying to plan and allocate funds for other expenses when you’re unsure what your mortgage payments will be. It's crucial to carefully evaluate your financial situation and make sure you have sufficient reserves to cover potential payment increases.

4. Limited long-term stability

If you plan to stay in your home for an extended period, the lack of long-term stability provided by adjustable-rate mortgages may not be suitable for you. With the potential for rising interest rates, your monthly payments could become unaffordable, jeopardizing your ability to maintain ownership of your home.

5. Potential for negative amortization

Some ARMs have a feature called negative amortization. This means that if the interest rates rise significantly, your monthly payments may not cover the accruing interest, resulting in an increase in your loan balance. It's crucial to thoroughly understand the terms of your ARM to avoid this situation.

6. Higher refinancing costs

While adjustable-rate mortgages offer refinancing opportunities, it's essential to consider the associated costs. Refinancing an ARM into a fixed-rate mortgage typically incurs closing costs and fees, which can add to the overall expense of homeownership. It's important to evaluate the potential savings against these costs before making a decision.

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