Adjustable Rate Mortgages
The advantage of a adjustable rate mortgage is that they typically offer a lower starter interest rate than fixed rate mortgages. Referred to as ARMs, these mortgages are designed for home buyers with particular short-term goals that are comfortable with changes in their mortgage payments after a specific set term. ARMs allow such borrowers to take advantage of a low teaser rate.
Common adjustable rate mortgage terms are fixed for 5 or 7 years based on a 30 year amortized loan, after which point mortgage rates will fluctuate.
With an adjustable-rate mortgage, the interest rate and payment can change. Typically, most ARMs have a period where the interest rate and payment stay fixed, such as a 3/1 ARM which has an interest rate period and payment that is fixed for three years, after which the interest rate and payment adjusts annually. ARMs are popular because they often have a lower initial payment than a fixed-rate loan.
While it has been typical for ARM payments to rise when they adjust, recent unprecedented declines in mortgage interest rates have caused many ARM loans to actually decrease as they come to their adjustment period. This is not a scenario that can be counted on to continue, however, so we must take that into account when discussing your financing choices.
An ARM can be a great choice if you are only planning on staying in the home for a few years, or if you expect a raise in your income within a few years. There are a number of ARM terms to choose from, including 3/1, 5/1, 7/1 and 10/1 terms, and some come with an interest-only option which lowers your monthly payment even further for the initial fixed period of the loan.
Let’s discuss whether an ARM can help you get into your new home quickly and meet your financial needs. Contact me today!