Adjustable-Rate Mortgages and You

Hung up on high-interest rates while you’re house hunting? I get it. It can be tough to choose a home, especially if you plan on moving after a few years. Whether you plan on buying a bigger home in the future or relocate for work, life is full of change and not all mortgages have room for that. But, what’s this? I spy with my little eye, a home loan that gives you the flexibility you need.

An adjustable-rate mortgage (ARM) is a good mortgage option when you plan to move within a few years or the current market conditions make it likely that you’ll finance to more favorable loan terms in the coming 5-10 years. ARMs are making a comeback as interest rates and home prices rise. Why are homebuyers choosing to get an ARM instead of something with a fixed rate? Over time, an ARM might actually be the best option.

What is an Adjustable-Rate Mortgage?

An ARM offers borrowers a lower "introductory" interest rate than what a conventional loan can offer. Once you buy your home, you pay this low rate for a set period of time. Once that time is up, the interest rate will get higher or lower based on the market.

How does an Adjustable-Rate Mortgage work?

ARMs are shown as X/Y by lenders. The "X" is the number of years at your set introductory rate while the "Y" represents how often the rate will change for the rest of the loan. For instance, if you get a 7/1 ARM, you will pay the introductory interest amount for 7 years. After that, the rate will change once a year.

ARMs have an adjustment cap and a lifetime cap to limit how much rates can adjust on one period and over the life of the loan.

Is an Adjustable-Rate Mortgage better than a Fixed-Rate Mortgage?

Adjustable-rate and fixed-rate mortgages are two of the most common home loan options among first-time homebuyers. Many borrowers often wonder if it is better to get an ARM or a fixed-rate mortgage.

The interest rate on a fixed-rate mortgage will remain the same throughout the life of your loan. Since the rate doesn’t change, it is a good option for homebuyers who want to live in their home for a long period of time.

Since ARM interest rates can fluctuate from year to year after the initial fixed period, it can give you a little more freedom if you want to move around more often. Other benefits of getting an adjustable-rate mortgage include:

• Lower initial interest rate
• Lower starting monthly payment
• Opportunity to afford a larger house
• Potential to pay less in return with favorable conditions

Think an ARM could help you finance your homebuying goals? Connect with one of our loan experts to get started.