In serving the Santa Clarita Valley with great affordable mortgages, we always take into consideration all loan options for our clients. Due to such historic low rates, borrowers have asked whether an adjustable rate mortgage (ARM) is a better option to a fixed rate mortgage. Adjustable rate mortgages, also known as variable-rate mortgages or floating mortgages, are so-called because the interest rate can change throughout the loan’s life.
Understanding What affects Adjustable Rate Mortgages (ARM)
If you are planning to buy a house or refinance your mortgage in the near future, you should consider taking out an adjustable rate mortgage. According to current mortgage rate trends, it’s expected to hover at the 3.5% mark well into 2021.
Before you decide on a fixed rate, it is crucial to understand how ARM works and how much uncertainty it may or may not bring. As mentioned above, the initial interest rate is fixed for a period of time, but your interest rates adjust afterward according to market conditions. Typically ARM is expressed as two numbers that you should be aware of, first being the length of your fixed rate and second being the length of your floating rate. For example, when your Loan officer offers a 2/28 ARM you’re getting a fixed rate for two years followed by a floating rate for the last 28 years of the loan.
The main advantage of an adjustable rate mortgage is that the initial rate is generally lower during the introductory period than what you can get with a fixed rate for the same term of the loan. Depending on the current economic shift, you may even find that your lender is setting a lower rate than the original fixed mortgage rate. Normally, this is due to a change in the economy, such as a rise in inflation or a cut in fixed interest rates.
In addition, there are hybrid adjustable-rate mortgages (also known as fixed-period ARM) that combine both types of mortgages. A borrower should be wary when choosing a hybrid ARM making sure to understand the risks associated with a reset date and expiration of the fixed rate period.
Hybrid ARM’s offer an initial fixed rate period and a variable rate period afterward. A standard hybrid ARM is a 5/1 rate, which means an initial fixed term rate of 5 years, followed by a reset every year. A variable rate mortgage is unique and is listed by the lender in a way that tells you how often the rate will be adjusted. Other potential rates might be 3/1, 7/1, or 10/1 ARM’s.
Compare Your Options
The most important thing to understand about an adjustable rate mortgage is that although interest rates are at an all-time low the rate can change over the life of the mortgage. If you’re planning to pay the loan in full earlier than expected or can financially handle rate adjustments, this may be a smart choice. Borrowers should also take into account that ARM’s come with rate caps to limit how drastic the payments can change—heard enough? Ready to talk to a Loan officer about getting your first home or refinancing? Fill out our online form in as little as 3 minutes.