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ADJUSTABLE RATE MORTGAGES what to know
Looking for a home lately? you’ve probably felt how tough affordability still is. And that’s exactly why more buyers are opting for adjustable-rate mortgages, or ARMs.
Here’s what you need to understand about how they work, and whether they make sense for you.
What Is an Adjustable-Rate Mortgage?
Since a lot of people aren’t familiar with this type of loan, let’s start with a definition. This is what the main difference is between a fixed-rate mortgage and an adjustable-rate mortgage:
“With a fixed-rate mortgage, your interest rate remains the same for the entire time you have the loan. This keeps your monthly payment the same for years . . . adjustable-rate mortgages work differently. You’ll start off with the same rate for a few years, but after that, your rate can change periodically. This means that if average rates have gone up, your mortgage payment will increase. If they’ve gone down, your payment will decrease.”
And one could change… either by a little, or a lot.
Of course, things like taxes or homeowner’s insurance can still have an impact on a fixed-rate loan, but the baseline of your mortgage payment is fairly steady. The big difference is that with an ARM, your monthly payment could change over time.
Why Adjustable-Rate Mortgages Are Getting More Attention
So, why do some buyers choose this option? Simply because of the upfront savings.
“Because ARM rates are typically lower than fixed mortgage rates, they can help buyers find affordability when rates are high. With a lower ARM rate, you can get a smaller monthly payment or afford more house than you could with a fixed-rate loan.”
*And right now, according to Mortgage News Daily and the Wall Street Journal, the upfront rate on an ARM is lower than a 30-year fixed mortgage.
If you’re wondering how that works out in real dollars and cents, here’s what Professionals say: According to their research, the typical buyer could save about $150 per month by taking out an ARM instead of a 30-year fixed mortgage.
For some people, that’s enough to make a difference.
More Buyers Are Choosing Adjustable-Rate Mortgages Today
A growing number of buyers are willing to trade the uncertainty later for a lower payment now. Mortgage Bankers Association (MBA) show that the share of buyers choosing ARMs has increased, especially over the last few years.
This doesn’t mean ARMs are becoming the go-to option for everyone. It only means some buyers are opting for this type of mortgage, so they can still buy today.
WHAT YOU NEED TO CONSIDER
If you are considering one, please remember that it depends on your financial circumstances and your risk tolerance.
An ARM may make sense if you plan to move before your rate would adjust or if you expect you’ll make a higher income in the future. But there are trade-offs you need to think through.
For example, once the fixed period ends, your rate can adjust, and your payment could increase, potentially by a meaningful amount depending on where rates are at that time.
And keep in mind, there’s also no guarantee mortgage rates will come down in the future, which means refinancing later isn’t always an option. That’s why it’s important to think through your plan, understand your long-term earning potential, talk to your financial advisor or an attorney and work closely with a trusted lender before you choose an ARM.
ARMs are getting more attention lately because they can make buying a home more affordable in the short term. But they’re not right for everyone. Do your research, and choose wisely.
So much to learn about! So much to choose! So much to consider!
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Judy@JudithSutton.com
COLDWELL BANKER...GUIDING PEOPLE HOME SINCE 1906
908 803-0472
"...the right relationship means everything..."
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