What Is an Adjustable-Rate Mortgage?
As their name suggests, adjustable-rate mortgage loans are mortgages whose interest rate changes over time, depending on market conditions. An ARM’s initial rate is fixed for a specified number of years at the start of the loan term, and then adjusts for the remainder of the loan term (unlike conventional loans, whose rates are fixed).
At The Home Loan Expert, we offer adjustable-rate mortgages as 3/1 ARMs, 5/1 ARMs, 7/1 ARMs, and 10/1 ARMs. The first number represents the number of years in which you will have a fixed rate. The 5/1 ARM is typically the most popular choice.
Some other important things to know about an adjustable-rate mortgage include:
- There’s a cap on how much your interest rates can go up, so there’s no need to worry about extreme variance at the end of your initial fixed-rate period. Caps exist in two forms: lifetime (in which there is a limit on how much of an increase you will see over the life of the loan), and period adjustment cap (in which there is a limit on how much of an increase can take place during your adjustment periods).
- On average, your initial loan on an ARM can be up to $510,000, depending on where you live (areas with higher costs of living can expect a higher loan ceiling).
- Many borrowers with an ARM can be required to pay as little as 5% upfront.
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Adjustable-Rate Mortgage Pros and Cons
An ARM can have a lot of benefits in the short term, especially if you only plan to be in your home for a short period of time. Over time, however, it has the potential to be a financial hassle. With that being the case, the initial benefits can still outweigh the later uncertainties, but it’s important that you know what you’re getting into so you can make that decision for yourself.
Ultimately, the mortgage that’s right for you comes down to you and your budgetary priorities. Depending on your situation at the start of the loan or at the end of its fixed period, your options may be limited.
That said, if you have the financial flexibility, it’s generally best to get out from under an adjustable-rate mortgage by the time the fixed rate ends. That way, you can enjoy all the up-front benefits of this type of loan without any of the uncertainties that come later!
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Pros
- Borrowers with an ARM can expect comparatively low interest rates, on par with those of a short-term mortgage. This, coupled with the longer term of an ARM, can leave you with lower monthly payments paired with relatively low cumulative interest. If mortgage rates dip in the future, you’ll have lower payments (and save money!).
- The loan terms of ARMs are a better match for the average length of homeownership.
- Caps limit how much the interest rate of an ARM can change.
- Given the low initial rates of an ARM, if you’re able to refinance or sell your house by the end of the fixed-rate period, you can enjoy all the best features of an ARM without having to worry about any of the cons.
- An ARM is easier to qualify for than many other mortgages. So, if credit score and income are issues for you, this option presents a lower barrier to entry.
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Cons
- The most obvious red flag is the very nature of an ARM. Since you can’t see the future, it can be hard to plan for what the housing market and economy will look like after the initial fixed rate of your loan. You can expect your interest rates to increase, but uncertainty over how much they will increase can be intimidating.
- While an ARM can be a great initial plan if you intend to move or refinance in a few years, remember things may change. If you end up stuck with this type of mortgage for the full term, you will be paying off your home for a long time—meaning your overall interest repayment will be significant.
- The high loan ceiling and low down payment requirements can be a boon to start with—but can quickly get you in financial trouble if you don’t have a plan to make your long-term payments if interest increases significantly.
How Can the Home Loan Expert Help?
If you are seeking to get an ARM or are trying to decide between an adjustable-rate mortgage or a fixed-rate loan, we are here to help. Our team of Experts is here to get you the mortgage help you need quickly. Whether you want to purchase a home or refinance your existing mortgage, we will get the process started in no time.
If you’re unsure of whether or not an adjustable-rate mortgage is right for you, let us walk you through your options. Give us a call today!
Learn About Other Loan Types
FHA Loan
The home buying process can be overwhelming and stressful, especially if you’re buying your first home (or if your financial circumstances make it more difficult to get an affordable loan). For many home buyers, getting a loan insured by the Federal Housing Administration (FHA) can be extremely helpful in not only securing the necessary financing to buy but also achieving the dream of owning a home (even while facing tough financial situations). FHA loans allow lenders to make home buyers better deals, resulting in lower down payments, lower closing costs, and easier credit qualifying. Here, we’ll go over the ins and outs of FHA loans, including what they are, who qualifies, and what the process of securing one looks like.
Fixed-Rate Loans
Fixed-rate mortgages—also called “conventional mortgages”—are basically the bread and butter of the mortgage industry. And that’s because this loan type is still the most reliable way to finance your home, offering affordability, flexibility, and so much more. As their name suggests, fixed rate loans have the same rate throughout the entire term of the loan. So even if interest rates rise while you’re paying off your loan, your rate and payment amount are locked in for the entire loan term. That’s why fixed-rate mortgages are so popular–they offer protections that ARMs can’t.
Conventional Loan
When buying a home, borrowers have a lot of options for securing financing. There are so many different types of loans, and each serves a specific purpose. This means that when you’re looking for a home loan, you should always do research on what kind of loan is best for your unique needs and financial situation. One of the most commonly utilized and most popular loan options that you’ll likely come across in your search is the conventional loan. Conventional loans are mortgage loans that aren’t insured or guaranteed by the federal government. These are a great choice for homeowners, since they offer lower costs than many other popular loan types. We offer competitive rates for both fixed and adjustable loans, with terms ranging from five to thirty years.
