(NewsNation) — Buying a home can feel complicated. While the introductory low payments of an adjustable-rate mortgage may seem appealing at first glance, homebuyers should consider their circumstances before committing.
An adjustable-rate mortgage has an interest rate that changes over time. Although they may begin with lower interest rates and monthly loan payments, those costs could rise quickly. For that reason, the Consumer Finance Protection Bureau recommends adjustable-rate mortgages only for homebuyers who can afford those increases.
Here are other factors to consider when deciding between an adjustable-rate or fixed-rate mortgage.
What are the pros of an adjustable-rate mortgage?
Flexibility and low payments early on are some of the main advantages of an adjustable-rate mortgage, depending on a homebuyer’s situation. Interest rates remain fixed for the first several months and then change periodically until the loan is paid off. That may help homebuyers qualify for a larger mortgage, according to NerdWallet.
There are caps on how much a loan recipient’s payment can increase, but those will vary by plan. Payments could also decrease if interest rates decline.
What are the cons of an adjustable-rate mortgage?
Someone who can’t afford the increased payments that come with an adjustable-rate mortgage risks losing their home to foreclosure. It’s an important consideration since an adjustable-rate mortgage’s interest rate is based on a changing index. That means loan recipients who choose this option don’t know in advance how much interest they’ll pay because that number could change.
The terms of an adjustable-rate mortgage can vary greatly and be hard to navigate. Even if a borrower is confident they understand the conditions, planning for those regular increases can be tricky as financial situations and rate indexes change, NerdWallet added.