Adjustable Rate Mortgage
Loan Type

Adjustable Rate Mortgage

When you’re shopping for a new home, one of your most important decisions will be what kind of mortgage to take out to finance your home. Your mortgage type will be the top factor that influences how much you can borrow(and thus what kind and size of home you purchase), as well as your monthly budget moving forward. For a variety of reasons, an adjustable-rate mortgage (ARM) can be an appealing choice in the short term, but it can seem scary as well. However, it’s important to understand how ARMs work, since this type of loan has repayment terms that may become less desirable over time.

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!

  • 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.
  • 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!

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