Buying a home is a big moment in everyone’s life. It can also be a big commitment of both time and money. But if you’re not planning to stay in the home 15 years or more, then an adjustable-rate mortgage (ARM) can allow you to take advantage of lower interest rates and help keep your monthly payments down until you’re ready to move out and move up.
How Adjustable-rate Mortgages Work
As the name suggests, ARM loan interest rates change based on market indexes after a short, initial term. All adjustable-rate mortgages begin with a “fixed-rate period” that locks in an interest rate for the first 1-10 years of the loan. Typically, the interest rate during that time is lower than a traditional fixed-rate mortgage. Once that period ends, the interest rate can go up or down depending on a number of market factors. This is why ARM loans are so attractive to homebuyers who don’t plan to stay in their home for long.
Fixed-rate for Initial Term
Depending on the exact loan terms, your ARM loan will feature an initial fixed-rate before resetting to an adjustable rate – so you’ll know exactly what your monthly payment will be. For example, a five-year ARM will have a fixed rate for the first five years. After that, the rate adjusts based on current indexes.
Lower Initial Monthly Payment
Initial interest rates for ARM loans are typically lower than what you’ll find on conventional fixed-rate mortgage loans. This means you’ll have a lower initial payment and may help qualified homebuyers afford the house they need.
Be Prepared for Rate Changes
ARM loans can be a great tool for homebuyers looking for lower initial rates and monthly payments, or homebuyers who plan to sell again before the initial term ends. However, after the initial fixed-rate term is over, the rate and monthly payment may go up. Predicting how your rate will change is difficult because it depends on a variety of factors in the market.
Adjustable Rate Mortgage (ARM) Loan Overview:
- Wide variety of term lengths available.
- Interest rate is fixed for the initial term, then adjusts yearly after that term is over.
- Rate adjustments are protected by yearly and lifetime caps.
- Interest rates often lower than conventional fixed rate mortgage loans.
- Available for new purchases and refinancing.