Adjustable rate mortgages (ARMs) have received some negative attention in recent years as many people found themselves unemployed or without enough equity left in their homes in order to refinance. However, in the right scenarios, an adjustable rate mortgage offers rewards in terms of potential lower short term interest rates.

An adjustable rate mortgage is a loan that has a fixed introductory interest rate for a relatively short period of time - typically from 2 to 10 years depending upon the product - after which time, the mortgage adjusts up or down based on the loan’s margin, caps, and the index which the loan is tied to. Generally, the fixed interest rate for the defined period of time is lower than traditional 15 to 40 year fixed rate mortgage products.

There are risks and rewards when it comes to considering a 5 year adjustable rate mortgage (ARM). The advantage is that you can save money by locking in a lower interest rate for the first five years. Rates tend to be lower the shorter the introductory period of an ARM, so a 5 year ARM would have a lower interest rate than a 7 year ARM. Plus, it may be possible to make additional principal reduction payments monthly or quarterly to try and shorten the life of the loan. Saving money with an ARM by having a lower interest rate for the fixed introductory time period may enable you to make those additional payments.

The risk of having an adjustable rate mortgage comes with the indeterminate nature of the interest rate after that fixed period. If you had an ARM in the early 2000's, you may have found yourself with an even lower interest rate once the ARM adjusted. However, if you had an adjustable rate mortgage in 2009 when many housing markets collapsed, you may have found yourself upside down in your mortgage without the ability to refinance out of the adjustable rate product. This could spell serious trouble for you if the indexes which the loans are tied to begin to increase.

One instance where a 5 year adjustable rate mortgage may make sense is if you know you likely won't be in your home for longer than five years. Then you may wager that you'll close out your loan before it can adjust to a potentially higher rate.

When considering the advantages of a 5 year ARM, it's important to think about the length of time you may live in your home, your current and projected future income, your ability to pay a higher monthly mortgage payment if the 5 year ARM adjusts to a higher rate before you close it out, and the savings you can achieve while paying lower interest rates during the fixed period.

It is strongly recommended that you consult with a mortgage and tax professional when weighing the risks, rewards, and advantages of a 5 year ARM. While an ARM can help save money in the short term, it's important to have a long term plan when choosing an adjustable rate mortgage. A licensed mortgage loan officer can help you understand the implications of choosing a 5 year ARM.