Your Guide to Adjustable-Rate Mortgages (ARMs)
Adjustable-rate mortgages (ARMs) can ease your entry into homeownership with competitive starting interest rates and manageable monthly payments. These programs are ideal for buyers who plan to sell soon or expect future financial growth.
What Is an Adjustable-Rate Mortgage (ARM)?
An initial fixed-rate period
Your interest won’t change for the first several years of your loan, so you’ll have plenty of time to enjoy steady payments before your rates change.
Caps on the total interest you pay
ARMs have caps on how high the interest rate can go during a specific adjustment period and the entire life of the loan. This protects buyers from market volatility and sharp rate increases.
A path to profit
ARMs are ideal for real estate investors who anticipate reselling the property within a few years of purchase. With this strategy, you can benefit from the initial fixed interest period and sell the home before payments are expected to increase.
What Can an Adjustable-Rate Mortgage Be Used For?
New Homes
Fixed interest rates at the beginning of a loan can make homeownership more accessible to families who are in the process of growing their resources.
Vacation Properties
Reduced monthly payments can make it feasible for the average homeowner to buy a second property and pay two mortgages.
Real Estate Investments
Adjustable-rate mortgages can help keep investment costs manageable for people who buy, renovate, and sell properties.
Pros
- Fixed initial interest rates
- Limits on rate increases
- Potential for rate decreases
- Ideal for short-term ownership
Cons
- Has less financial predictability than a fixed-rate mortgage
- Your payments are usually higher at the end of the loan than they were at the beginning
- Your interest rate can continue to fluctuate based on market conditions
Talk to our mortgage experts today about finding the right loan for you.
Alternatives to an Adjustable-Rate Mortgage
- Interest-only mortgages also offer attractive initial payments
- You only have to pay the interest at the beginning of the loan
- Your payment amount will go up later when principal payments are added
- A fixed-rate mortgage offers stable interest rates that don’t go up or down
- Your payment amount never changes
- Good for long-term financial planning
- FHA loans are guaranteed by the Federal Housing Administration
- These have more flexible qualification criteria for borrowers
- The down payment requirements may be more flexible than for ARMs or fixed-rate mortgages.
How Do I Know If an Adjustable Rate Mortgage Is Right for Me?
You have a stable income that you expect to rise.
If you currently have a steady income and expect to get future raises or promotions, you could be in a good position to enjoy a competitive interest rate now while being prepared for rate changes later on.
You plan on renovating and selling the property.
If you’re buying a fixer-upper or plan to sell after making upgrades, you may be able to avoid paying higher interest rates if you can close before the initial fixed-rate period ends.
Current market interest rates are high.
If the current interest rate is on the high side, an adjustable-rate mortgage can make initial payments more manageable. Then, if rates go down, you stand to gain even more when the adjustable period begins. If they don’t, you could potentially consider refinancing.
When Is the Best Time to Use an Adjustable Rate Mortgage?
The best time to apply for an adjustable-rate mortgage is when market interest rates are competitive. This lets you take advantage of favorable terms at the beginning of your loan and gives you time to make plans for potential payment increases in a few years.
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FAQ
When does the interest rate on an adjustable-rate mortgage change?
How high can my interest rate go after the initial fixed-rate period?
How does mortgage insurance work with an adjustable-rate mortgage?
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