Thursday, October 27, 2022 / by Steve Ticknor
For the past few years, interest rates hit historical lows. Unfortunately, that is no longer case. We keep seeing rates go up, up, and UP! With the lower rates, financial experts suggested that a fixed-rate mortgage was the better option for home buyers. However, that may no longer be the case. How do you know whether to choose a fixed-rate (FRM) or an adjustable-rate mortgage (ARM) when it comes to your home loan options?
Adjustable-Rate Mortgage for the Home Buyer
How Does an ARM Work?
Unlike fixed-rate mortgage loans, the interest rate on an adjustable-rate mortgage fluctuates over time. Initially, it starts out lower than a fixed-rate mortgage. For example, Freddie Mac shows the average 30-year FRM at 7.08% as of the writing of this post. However, they show the ARM at 5.96%. On a $400,000 mortgage, that means a difference of almost $300 a month ($3600 in the first year). But this will not always be the case. The rate may go up or down.
For a set period of time (usually the first five to seven years of the loan), the interest rate on an ARM stays the same. At the end of that set timeframe, you enter the adjustment period. That is when the lender looks at how the market is doing and adjusts the rate accordingly. If rates are up, your rate will go up. On the other hand, if rates go down, your rate goes down as well.
Pros of an ARM
For first-time homebuyers, an adjustable-rate mortgage may be more appealing. Why? Typically, this will not be their only home. So, if this is your starter home or a property you only plan on living in for five years or less, you might want to consider an ARM. You pay less each month, which puts more money in your pocket for other expenses or to put towards paying down your principal.
Cons of an ARM
On the flip side, you run the risk of not selling your home before the end of your initial fixed-rate period (usually the first five years). Then, your monthly payment may go up on you. Of course, you may be able to refinance at that time. But we can't predict what rates will be in the future or what financial situation you may find yourself in at that time. Plus, not knowing what to expect your mortgage payment to be can create unwanted stress.
Before you decide between an ARM and an FRM, talk over your options with your lender. Make sure you receive all the answers you need for clarification. Then, discuss these options with your co-borrower before making a final decision. Finally, contact us when you are ready to start looking for a Havasu home of your own.
Originally posted on our Lake Havasu area real estate blog here: https://www.sunstonerp.com/adjustable-rate-mortgage-explained/.