An adjustable rate mortgage, or ARM, is a home loan that offers a variable interest rate over the course of the loan. ARMS usually begin with an initial fixed interest rate for a specified period and then transitions to a variable interest rate over set time periods. ARMs are a popular choice for millions of home buyers today because they often lower interest rates than other loan options. At loanDepot, ARMs commonly offered include those with an initial fixed rate period of three, five, seven or ten years. After that, the interest rate can adjust up or down depending on the financial markets.
What is the difference between a fixed rate and adjustable rate mortgage?
ARMs begin as with a fixed rate that last for a stated period—usually between three and ten years, at which time they convert to an adjustable interest rate for the remainder of the mortgage term. Adjustable interest rates generally start lower than those of a comparable fixed rate mortgage and are ideal for borrowers who don’t plan to own the home for an extended period of time. ARMs are also a good choice for borrowers who want a smaller mortgage payment at time of purchase or who want to keep their options open for the future.
If the thought of a sudden rate increase does not deter you, then the lower rates and reduced monthly payments with an adjustable rate loan can be more suitable to your needs, especially if you expect to move before the rates adjust.
Should I consider an adjustable rate mortgage in today’s market?
With home prices still appreciating and interest rates slowly continuing to rise, an ARM can offer significant money-savings benefits. Here are some reasons to consider an ARM:
- Lower Monthly Payments
Going with an ARM can help keep your monthly payments lower, while also providing a measure of security and peace of mind during your fixed rate period. Conversely, a 30-year fixed rate mortgage will compound more overall interest in the first few years of the loan, which means you’re paying more toward the interest—not the principal—of the loan.
- Faster Equity Accumulation
Because ARMS carry lower interest rates during the fixed period of the loan, selecting one may enable you to build equity in your home at a more accelerated rate. You can also use that initial lower interest rate to your advantage to make a bigger dent in your mortgage balance during the loan’s fixed period. However, although the equity may accumulate at a faster rate during the introductory period of the loan, it’s important to consider the holistic picture, especially in the event you don’t sell the property and/or interest rates go up after the teaser period expires.
- Interest Rates Could Go Down
It is always possible that, at the end of your fixed loan period, that market interest rates could decrease, which could ultimately result in an even lower monthly payment. An ARM enables you to take advantage of falling interest rates without having to refinance your loan, saving you fees and closing costs.
- Ideal for Short-Term Homeowners Seeking More Liquidity
If you’re not planning to live in the home for 30 years, why finance it for 30? If you have a solid plan in place to move before your ARM loan resets, you are safe from fluctuating interest rates, and will ultimately save money.
Are there downsides to choosing an ARM?
- Interest Rates and Payments Have the Potential to Rise
The greatest prospective downside is an increase in interest rates after your fixed period expires. If you are someone who values the stability and predictability of a fixed rate mortgage, then an ARM may not be your ideal choice given the risks associated with a potential jump in interest rates.
You should consider all the pros and cons (and whether the potential risk is clearly being outweighed by the benefit you are going to receive during the introductory fixed period of the loan) before deciding between a fixed rate and an ARM. Some important questions to consider:
• How long do I plan to stay in the home?
• What is the current interest rate environment?
• Could I still afford my mortgage if the rate goes up in the future?
• How often does the ARM adjust?
Now that you understand the benefits and potential risks associated with an ARM, does it sound like a viable option for you? Our Loan Consultants can help you weigh your options and select the best choice for you. Give us a call today!
