With today’s rising mortgage interest rates and high Bay Area housing prices, buying a home may seem out of reach, particularly if you are set on obtaining a 30-year fixed-rate mortgage loan. Many borrowers are turning to adjustable-rate mortgages to not only save money with a lower rate than a fixed mortgage might offer, but also to possibly get into their dream home sooner. If you’re nervous about the thought of an adjustable-rate mortgage (ARM), you are not alone. There are situations, however, in which an adjustable-rate mortgage could be a good choice.
Here are a few things for you to consider about adjustable-rate mortgages:
ARM Loans Tend to Have Lower Rates
A major difference between fixed- and adjustable-rate mortgages is how the rate is determined. Differences include:
- Fixed-rate mortgages offer the same rate and payment for the life of the loan, but tend to be at a higher interest rate than an ARM.
- Adjustable-rate mortgages typically begin with a fixed rate for an introductory period of time, after which the rate adjusts up or down during a set period of time. This could be every six months or annually. Your payment will also increase or decrease with the rate change.
Example of How an ARM Loan Works:
There are a variety of adjustable-rate mortgages available including 5/1, 7/1, 10/1, and more. 1st United offers a 7/1 ARM. Here's how it works:
- A 7/1 ARM has a 30-year term.
- It has a lower introductory rate than our 30-year fixed-rate loan.
- The rate on the ARM loan will be fixed for the first seven (7) years, then adjusts each (1) year after.
- The consumer has the benefit of a guaranteed payment and rate for seven years.
Rates Can Go Up and Down
Thirty years is a long time and we’ll see many rate adjustments during that time. Mortgage rates might go up and the rate on your adjustable-rate mortgage could adjust upward, but depending on the rate climate, they could also go down, which would lower your rate and your payment.
See How Much You Can Save with an Adjustable-Rate Mortgage
*For demonstration purposes only. View current rates. Actual APR based on credit qualifications.
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Call us at (800) 649-0193, extension 4925 for today's rate.
ARM Loans Have a Cap
Adjustable-rate mortgages typically come with three types of rate caps built in that help to control how much the rate will fluctuate:
- Initial cap: The maximum amount that the interest rate can adjust the first time, after the initial fixed-rate period.
- Periodic cap: A limit on how much the interest rate can adjust during the periodic increases.
- Lifetime cap or ceiling: Controls the overall rate increase or decrease over the life of the loan.
Our 7/1 ARM has a built-in cap that controls how high the lifetime maximum interest rate could increase and how high the rate can increase at the seven-year mark. Knowing the highest amount of interest that you’ll ever pay can help you plan for changes.
When to Consider an ARM
There are several situations in which an adjustable-rate mortgage might be a good option for you. They include:
- If you plan to stay in your home a short time, choosing a fixed-rate mortgage at a higher rate could result in over-payment of interest – money that could be in your pocket or invested for your future. An adjustable-rate mortgage might be a better choice if you only plan to live in the home 5 to 10 years.
- An ARM loan is a good choice if you anticipate rates will decline in the next 5 to 10 years, giving you an opportunity to buy a home now, then refinance to a fixed, lower rate for the remainder of the time you plan to stay in the home.
- It could also be a good consideration if you expect that your income will increase in the coming years, making an increased payment seven years down the road affordable.
Run the Numbers
To know for sure if an adjustable-rate mortgage is right for you, we recommend doing the calculations and comparing the costs. Try our mortgage calculator or schedule an appointment with one of our mortgage specialists. We are happy to walk you through the options so you can choose the best loan for your situation.