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why you should consider an adjustable rate mortgage

why get an adjustable rate mortgage

In this article, we’ll explore the reasons why an adjustable mortgage could be a good option for you. We’ll also look at some of the potential risks involved with this type of loan.

An adjustable mortgage, also known as an ARM, is a type of home loan that has an interest rate that can change over time. This type of mortgage can be a good option for some people, but it’s not right for everyone. So before you decide if an ARM is right for you, it’s important to understand how they work and what the benefits and risks are.

You'll have more flexibility when it comes to your monthly payments

One of the benefits of an adjustable rate mortgage is that it offers borrowers more flexibility when it comes to making monthly payments.

With a traditional fixed-rate mortgage, the borrower is locked into a set monthly payment for the life of the loan. However, with an adjustable rate mortgage, borrower typically locks in at a lower interest rate for a shorter period of time, such as 5, 7 or 10 years. This would allow for a lower monthly payment during those years of the loan.

If you know that you will be either selling your home or refinancing in a short amount of time, then it would make more sense to take on an ARM, rather than have a higher rate with a 30 year fixed mortgage.

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Lock in at a lower rate during a high rate environment

The second half of 2022 hasn’t been kind to interest rates.

Currently, mortgage rates are hovering at nearly 20 year highs, mainly due to inflation. With the average 30 year fixed mortgage at 6.5% or more, you can consider an adjustable rate mortgage which will help you lock in at a much lower rate.

For example, if you are looking for a $500,000 mortgage with a rate of 6.5%, you would be staring at a payment of about $3,160.00 per month.

Meanwhile, compared to a 5/6 ARM at 5.5%, the payment would be about $2,838 per month, giving you an estimated savings of $321 monthly.

Why you should not consider getting an adjustable rate mortgage

An ARM loan may not be the best option for someone who plans on staying in their home for a long period of time. If you plan on being in your home for more than 10 years, you may want to consider a fixed-rate mortgage, which will offer you a stable monthly payment.

Also, an adjustable rate mortgage may also not be the best option for someone who is not comfortable with the idea of their monthly payment changing over time. Likewise, if you don’t believe that you may not be able to refinance in the future, then you should not consider this program either.

Refinancing an adjustable rate mortgage mortgage for a fixed loan

When market conditions change, i.e., when rates are lower, refinancing an adjustable rate mortgage for a fixed can make a lot of sense.

While having an adjustable rate mortgage can lead to lower monthly payments initially, it also means that your payment could increase in the future if interest rates rise. For this reason, many homeowners choose to refinance their adjustable rate mortgage for a fixed loan. This way, they can be sure of what their monthly payment will be for the life of the loan.

Refinancing can also help you to avoid having your interest rate reset at a higher level, which could make your monthly payments unaffordable. 

An adjustable rate mortgage can be a good option for some people, but it’s important to understand the benefits and risks before you decide if it’s right for you.

 

If you have any questions about adjustable rate mortgages or whether or not one is right for you, please contact us. We would be happy to help.

 

Start your home purchase journey

Get answers to your questions and save thousands on your home loan by comparing different programs and interest rates. 

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