An adjustable-rate mortgage (ARM) is a type of home loan that begins with a low fixed-interest rate for a period of three to ten years. After this initial period, the interest rate adjusts periodically. Unlike fixed-rate mortgages that maintain the same interest rate throughout the loan’s duration, ARMs offer borrowers a different approach to financing their homes.

How exactly does an adjustable-rate mortgage work?

An adjustable-rate mortgage (ARM) offers the flexibility of having your payments adjust according to changes in interest rates, based on your specific loan terms and a benchmark rate index. Opting for an ARM instead of a fixed-rate mortgage can potentially result in significant savings, potentially amounting to thousands of dollars. It’s advisable to consult with loan officers who can explain the risks associated with ARMs and provide a clear understanding of the potential increase in payments.

While some believe that fixed-rate mortgages are always the superior choice, ARMs can be a viable option for home buyers who anticipate having the loan for only a few years. It’s important to carefully consider the advantages and disadvantages before making a decision.

Advantages of Adjustable-Rate Mortgages

Low payments during the fixed-rate phase

A hybrid ARM can provide potential savings during the initial fixed-rate period. Common ARM terms include 3 years, 5 years, 7 years, and 10 years. For instance, with a 5-year ARM, your introductory interest rate remains unchanged for five years before it can adjust. This allows for predictable and lower payments over the course of five years.

Moreover, the initial low rate of an ARM may enable you to qualify for a larger mortgage compared to a fixed-rate loan. However, it is essential to consider whether you would be able to afford higher monthly payments in the future if necessary.

Flexibility

If you anticipate significant life changes in the next few years, such as moving or selling your house, an ARM may be a wise choice. During the fixed-rate period, you can take advantage of its benefits and sell the property before the less predictable adjustable phase begins. This allows you to make the most of the ARM’s advantages while avoiding potential uncertainties in the future.

Rate and payment caps

Adjustable-rate mortgages (ARMs) are equipped with caps that establish limits on both the extent to which the mortgage rate and your payment can rise. These limits comprise restrictions on the magnitude of rate adjustments during each period and the overall rate change throughout the duration of the loan.

Your payment amounts can potentially decrease

If interest rates decrease, causing the index that your ARM is based on to decline, your monthly payment could also decrease. While this may tempt you to opt for an ARM, it is wiser to base this decision on your own financial situation rather than speculating about market trends..

Drawbacks of adjustable-rate mortgages

Your payments might increase

Once the adjustable period commences, should interest rates increase, borrowers may encounter difficulties in meeting the larger payments that ensue.

Things may change

Adjustable-rate mortgages (ARMs) necessitate borrowers to anticipate the eventual shift in interest rates and subsequent increase in monthly payments. Despite meticulous planning, however, there may be unforeseen challenges in selling or refinancing at the desired time. In the event that you are unable to sustain the payments after the fixed-rate period of the loan, there is a risk of losing ownership of the property.

ARMs can be intricate

Adjustable-rate mortgages (ARMs) can be accompanied by intricate regulations, fees, and structures. These intricacies can present risks for borrowers who lack a comprehensive understanding of the terms and conditions involved.

Is an ARM the right choice for you?

Whether an ARM is a suitable choice depends on your objectives and comfort level with uncertainty. If you intend to sell the property or pay off the mortgage before the adjustable rate increases, you can potentially save money. However, if you plan on settling in for the long term and prefer the certainty of a consistent mortgage rate and monthly payment, a fixed-rate mortgage is the recommended option.

Contact Sword Mortgage To Learn More About Your Options

Call (770) 757-5750 or complete our online form to speak with a loan expert at Sword Mortgage to get help navigating your options and find a loan that fits your needs today.