Adjustable Rate Mortgages
When are ARM Loans a Good Solution?
You’re shopping for a home that you know you’ll spend at least the next 5-10 years in. It’s not your forever home, so you may be wondering how to make the best financial sense of the situation. Or maybe you’re trying to get the most out of your monthly budget in an environment of elevated rates? Getting pre-approved for an ARM might be the best solution for your situation. In this blog, we’re honing in on Adjustable Rate Mortgages (ARM loans) and explaining when they may be a helpful solution.
What are ARM Loans
An ARM is a loan that has an interest rate that changes after a certain period of time, based on the market. When you obtain an ARM loan, you first are in the fixed rate period; you begin with a low, fixed interest rate for an agreed-upon period of time. Typically, the fixed rate period lasts 5, 7, or 10 years. After this period ends, you enter the adjustment period; rate adjustments begin, and your interest rate is determined by the market.
For example, you take out a 7/1 ARM in which the principal balance is amortized over 30 years. You will pay a lowered, fixed interest rate for the first 7 years of the loan. After that, the rate for your remaining 23 years adjusts every year, as indicated by the 1 in “7/1.”
When are ARM Loans Beneficial?
ARM loans include periods of both predictability and unpredictability. So, how do you know if an ARM would be advantageous to you? Here are some things to consider.
A Borrower on the Go
If the house you are purchasing is one you do not plan to stay in for a long time, ARM loans are probably a good choice. This is because, if you move before the fixed period ends, you ensure a low rate for your entire stay in the home.
Solving for Today’s Rates
Just as you can temporarily buy down your interest rate with the 2/1 Buydown program, ARMs can provide you with a way to pay less per month and refinance later. Even if you do not plan to sell the home in 5-10 years, we can reasonably assume that there will be a time within the initial fixed rate period when 30-year fixed rates are lower than they are today. At that time, you can refinance to a permanently low rate.
Although your rate may increase after the fixed period, there are caps in place that limit how much your rate and payment can change during each adjustment period, and over the total life of the loan. Thus, you may still have insight as to if you can afford an ARM in the long run.
Additionally, because ARM loans come at a much lower initial rate, you can save money over the fixed rate period. You can put these savings toward either your principal loan balance or the purchase of your next home.
If you think an ARM loan may be right for you, talk to one of our mortgage bankers to get pre-approved. We can help you make informed predictions and decisions about what type of loan is most financially beneficial for you. Contact our team today to learn more.