Adjustable Rate Mortgages used to be very common, but over the last few years, they fell out of fashion, especially because rates were so low that it made more sense for buyers to lock in on a fixed low rate. So, once again, adjustable rate mortgages are back in the news. They come into prominence when rates start to rise and can be risky, or can be a great tool. Here’s what you need to know.
An adjustable rate mortgage or ARM can be appealing because the introductory interest rate is often lower than the current rates for fixed-rate mortgages. For example, the current rates for 30-year fixed-rate mortgages are just above 5% right now, the highest they have been since late 2018. The initial rate on a 5/1 ARM loan is just above 4% right now.
The 5 in 5/1 ARM loan represents the introductory term for the interest rate. After that, the 1 in the 5/1 represents how often the interest rate can change. Depending on the lender and the loan, you can have a 3/1, 5/1, 7/1 or 10/1 adjustable rate loan. If the market rate is higher than the initial rate, your mortgage payment will go up after that initial introductory period is over, if it is lower, then your mortgage payment will go down, if it is the same, your payment will remain unchanged. This means that an ARM loan can be risky for many people, especially people on a fixed income. There are generally caps on the rate jumps at the adjustment period, and caps on the rate for the life of the loan so your payment won’t be able to grow exponentially.
So, ARM loans can be really attractive for buyers who expect to be selling before the introductory period is over. They can also be perfect for a buyer who expects to refinance before their rate adjusts. But, since you can’t predict future market conditions, you may be stuck with a mortgage that is unfavorable to you and you can’t get out of it. Generally, if a home is more expensive, the savings on the rate during the introductory period could make the risk worthwhile. For lower priced homes, the risk may outweigh the benefit so a fixed-rate mortgage might still be right for you.
For a recommendation for a great mortgage broker, or to schedule a showing on a home in the Lake Wylie area, call us at 803-831-8588. You can view current listings and create custom searches on our website here.