What is an Adjustable-Rate Mortgage (ARM)—And Should You Get One?
If you're in the market for a new home, you've probably come across the term "ARM" and wondered what it meant. An ARM, or adjustable-rate mortgage, is a type of home loan with an interest rate that can change over time. In this blog post, we'll explain what ARMs are and whether or not they might be a good fit for you.
What Is An Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage (ARM) is a type of loan in which the interest rate may fluctuate over time, typically in response to changes in the market. The starting interest rate on an ARM is usually lower than that of a fixed-rate mortgage, making it attractive to borrowers who are looking to save money in the short term. However, because the interest rate can change, there is more risk involved with an ARM than with a fixed-rate mortgage.
ARMs are available in many different varieties, with terms that can range from 1 year to 30 years. The most common type of ARM is a 5/1 ARM, which has a fixed interest rate for the first 5 years and then adjusts annually for the remaining term of the loan.
Is An Adjustable-Rate Mortgage Right For You?
Whether or not an ARM is right for you depends on your personal circumstances and financial goals. If you’re planning on staying in your home for only a few years, an ARM might be a good option since you’ll likely save money on interest payments in the short term. On the other hand, if you think you might want to stay in your home for longer than the initial fixed period, you might want to consider a different type of loan so you don’t have to worry about your interest rate changing down the road.
ARMs can be beneficial for borrowers who are comfortable with taking on a bit more risk in exchange for the potential to save money. If you’re thinking about getting an ARM, it’s important to do your research and understand how they work so you can make sure it’s the right decision for you.
What Are The Common Types of ARM Loans?
Hybrid ARMs are a great option for those who want the flexibility of both fixed and adjustable rates. With this type loan, you’ll have an interest rate which will be set at first but can adjust based on future market conditions every so often up until your term is over, with great savings in cost balanced by additional volatility over a standard fixed-rate.
Another type of ARM is an interest-only (I-O) ARM. These loans entail paying only the interest portion of your loan, no payment toward principal, for a time-frame of usually 3 to 10 years. These types of mortgage help to free up funds during the interest-only period, which you can spend on furniture, updates to the property, you name it. However, the longer the interest-only period, the higher your payments will be once the period expires. This is a fairly niche loan type but it makes sense for some borrowers.
As the name suggests, the payment-option ARM has multiple options for payment. These options might include paying principal plus interest, paying only interest, or paying a minimum amount that is even smaller than just the interest. Like the interest-only ARM, the less you pay to start, the more you’ll be paying later. So these types of ARM only make sense for certain borrowers who have a real need to free up funds on the front-end of their loan period.
Picking the Right Loan—And Home—For You
As with any financial decision, choosing whether or not to get an adjustable-rate mortgage comes down to what makes the most sense for your individual situation.
ARMs can be a good option for borrowers who are comfortable with taking on additional risk in order to potentially save money on interest payments over time. If you’re considering an ARM, make sure to do your due diligence and work closely with a well-regarded, experienced lender, so that you understand how they work and whether or not they’re right for you.
If you have a home-buying question, or if you could use a recommendation for a great lender in Orange County, CA, please don’t hesitate to reach out. We’re here to help and happy to serve.
Looking for more guidance? We are happy to learn about your situation and discuss your options with no obligation. Contact the Brad Feldman Group.