Are you looking for a mortgage? If so, it may be worth considering an adjustable rate mortgage (ARM).
ARMs, as their name implies, have adjustable interest rates during the life of the loan that depend on fluctuations of markets and federal rates. While this may sound intimidating, ARMs also typically have a period of fixed-interest at the beginning of the loan which allows for borrowers to ease into the mortgage process.
If you’ve been wondering whether an ARM is right for you, this guide will help you determine the benefits of this type of loan.
ARMs Are Cheaper than Fixed Rate Loans
While the majority of borrowers still prefer 30-year fixed rate mortgages, they are paying the highest cost to do so. Any loan with a longer term is going to end up costing the borrower more due to increased interest, which is where an ARM can bring you a more affordable mortgage—possibly with even better terms.
ARMs Offer an Introductory Period
If you’re concerned with the payments at the beginning of your loan, know that ARMs come with initial periods where your interest rate is fixed. The most common introductory periods are between three and ten years, which gives you an opportunity to have stable, regular payments before interest rates are subject to change.
ARM Rates Typically Change Annually
You don’t have to worry about an ever-increasing rate day-to-day; rates for ARMs are generally increased once a year. However, both your introductory period and your rate changes will depend on your lender and their offerings.
Lenders Must Provide Caps on Changes
It wouldn’t be sustainable to have an ARM if rate changes increased every day, so lenders will give you caps on how much your rate can increase, both by year and over the life of the loan. This information will be clearly spelled out in your loan documents.
ARMs are Ideal for Short-term Loans
If you’re buying a property that you plan to hold for under ten years, an ARM will offer you better rates and fewer payments overall, with deals depending on your loan structure. If you’re living somewhere for five years and have an ARM with a five-year fixed rate, you’re getting the benefit of lower costs, yet don’t have to worry about variable rates and payments.
Ultimately, the type of mortgage you get should work for your financial and personal situation. If you are concerned with job stability, a 30-year fixed rate mortgage may provide you with peace of mind regarding your monthly payments, whereas if you may be moving in the next ten years, an ARM can give you a better deal on your overall payments.
Remember, mortgage interest rates will depend on your credit and overall financial picture, so getting these factors in order will make you an even more attractive candidate to lenders. If you’re ready to start talking about mortgage options, answer a few questions here, and a home lending expert will contact you.