Also called ARMs, adjustable-rate mortgages work well for buyers who want to generate equity fast, save money sooner or sell their home within a few years.
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Adjustable-Rate Mortgage (ARM) Loans
Also known as variable mortgage rates, adjustable-rate mortgage (ARM) loans are home loans with potentially fluctuating interest rates over the life of your loan. While there is a chance ARM loan interest rates can rise, ARM loans also may stay as low, or fall lower than your initial mortgage loan rate.
Due to the fluctuating interest rates, those interested want to do their homework as ARM loans are a great option if:
You plan to sell your home within a few years
You have wiggle room in your budget to take on a (potential) interest rate increase
Read on to learn more about adjustable-rate mortgages to better determine if an ARM loan is right for you.
Types of Adjustable-Rate Mortgages
There are a variety of options when it comes to adjustable-rate mortgage loans. For example, a 5/1 ARM loan offers an introductory interest rate for the first five years of homeownership. After five years, the rate can either increase or decrease annually depending on the current interest rate trend. Another type is a 5/5 ARM loan. In this case, there is a fixed introductory rate for the first five years of homeownership, after which the interest rate can either increase or decrease every five years. These are just two of the many variances available.
The Pros and Cons of ARM Loans
When deciding whether or not an adjustable-rate mortgage loan is right for you, it is important to consider the pros and cons of this loan type. While ARM loans have fluctuating interest rates, there are a few benefits for an interested borrower. Consider the following benefits and setbacks of ARM loans to determine your interest.
- Build Equity Faster
ARM loans offer lower interest rates in the present and future. This means you’ll pay less money toward interest, helping build your home equity faster. In months where your interest rate is lower than normal, you may be able to put that difference in savings or toward your principal balance and build your equity quickly.
- Potential Money Savings
ARM loans have the potential to save you money because you may have the opportunity to take advantage of low interest rates. When combined with the money-saving power offered by direct mortgage lenders like Wyndham Capital, you’ll be well on your way to buying or refinancing your home.
- Fluctuating Rates
It is no surprise the biggest difference of ARM loans from a conventional loan is the fluctuating interest rates. While this does mean the rates can decrease over time, they also can increase, causing your monthly mortgage payment to rise.
- Rate Caps
Even with the fluctuation of interest rates, ARM loans do have “caps,” which put a limit on the amount of increase that can happen with your rate and monthly payment. Similar to the interest rate, the cap rate changes over the lifetime of the loan.
- Loan Complexity
Adjustable-rate mortgage loans aren’t cookie-cutter loans. There are a lot of rules, fees and processes for this loan type. If you don’t fully understand the structure of an ARM loan, it may end up costing you more in the long run.
If you are interested in pursuing an adjustable-rate mortgage loan, it could be helpful to consult with a knowledgeable mortgage lender to ensure you understand how an ARM loan works and the benefits it can bring.
Is an ARM Loan Right for Me?
If you’ve read through the pros and cons of an adjustable-rate mortgage loan and are still unsure if this loan type is right for you, consider comparing this mortgage option with other available loans. You can do this by using a simple mortgage calculator, which will give you a better idea of the cost of an adjustable-rate loan compared to other loan types. Taking your financial situation into consideration, you will be able to better determine if the cost, risk and reward are worth it to you. Remember, over the life of your loan, an ARM loan can save you thousands of dollars over a fixed-rate loan. This is especially true if you choose a lower 5-, 7- or 10-year loan term.
So, what are you waiting for? After you plug in your home loan figures into our simple mortgage calculator and decide it’s time for you to buy or refinance your home, speak with one of our mortgage loan officers for help deciding whether adjustable-rate mortgage loans are the right option for you.