Mortgage Rates 10 Year ARM

Interest rates are rising, so you may be wondering whether an adjustable-rate mortgage, or ARM, is right for anyone.

It still can be. But you need to understand when an adjustable-rate mortgage will, and will not, work for you.

Like a January bikini

The idea of an adjustable-rate mortgage in a rising interest rate environment sounds as impractical as wearing a swimsuit on a cold winter day. And in many cases, that's true. After all, you don't want to find yourself in a position where your interest rate and monthly payment are moving higher.

Here's how it might work: Let's say you got a $250, 000 5/1 ARM, meaning it has a fixed rate for the first 5 years and adjustments every year (the "1" in 5/1) thereafter. Your initial interest rate was 3.25%, and you paid $1, 088 per month in interest and principal. If, after 5 years, your rate rises a half-point, to 3.75%, your monthly charges would jump to $1, 148.

But what if you plan to be in your home only 5 or 6 years? You may want to consider an adjustable mortgage that offers a fixed rate for the first 7 or 10 years before it starts to change. As long as your timetable pans out, you take advantage of the way the mortgage functions as a fixed-rate loan in the early years, and at a lower rate than a traditional fixed-rate mortgage.

A note of caution

This strategy is not without risk, however. If you end up being in the home longer than expected you could, indeed, face upward rate adjustments. And don't automatically assume you'd be able to refinance at some future date, because you don't know what your income or home value might be.