What is an Adjustable-Rate Mortgage and How Can it Help You Save Money?

Blog posted On June 02, 2022

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Not all mortgage rates are as high as you think. Typically, the 30-year fixed rate average is what most people notice when they see the current market rates. Most home buyers lock into a 30-year fixed-rate mortgage because of its consistency. But fixed-rate mortgages aren’t your only home financing option. In fact, they’re often pricier than some alternatives, like the adjustable-rate mortgage (ARM).

What is an Adjustable-Rate Mortgage?

An ARM is a type of mortgage with an interest rate that rises and falls with the market rates at certain points throughout the loan term. It comes in various loan terms such as 3/1, 5/1, 7/1, or 10/1. The first number (3,5,7, or 10) is the number of years in the introductory period. During the introductory period, you will have a fixed-interest rate. The interest rate during an ARM introductory period is usually lower than the average 30-year fixed rate. After the introductory period is over, your interest rate will change every year (the ‘1’ in the loan term). Some ARMs have different term structures. 

When ARMs might be a good option to consider

ARMs may not be the right fit for everyone. But in certain cases, they could be worth exploring. 

  1. If you’re taking out a larger loan

A larger the loan means higher monthly mortgage payments and more money paid toward interest. Even if your interest rate is the same as someone with a smaller loan. Utilizing an ARM to secure a lower interest rate – even if it’s just for the introductory period – could help you save in the long run. Of course, this depends on how long you plan to stay in the home before selling.

  1. If you’re not looking to invest in a lifelong home

Staying in a home for a longer period of time with an ARM can be risky. If you just plan to stay in the home for the ARM introductory period, or a little bit beyond, it could be smart. As mentioned, ARMs often have introductory periods with lower fixed interest rates than the typical 30-year fixed-rate mortgage. But once that period is over, your interest rate will gradually start to match the market rates.

  1. If you’re looking for a cheaper way to break into homeownership

Higher home prices and mortgage rates ultimately mean higher monthly mortgage payments, which can be difficult for first-time buyers. If you’re looking a way to break into homeownership without breaking your monthly budget, an ARM could be a good short-term solution. Over the course of your introductory period, you may get a raise, switch to a higher paying job, or purchase your next home with another person.

ARMs are a good option when mortgage rates are rising higher. If you want to explore your ARM options, let us know.