Adjustable Rate Mortgages (ARMs) offer lower start rates on mortgages with the risk that the rate will adjust in the future. The most common ARM is the 7 year ARM, wherein the rate is set for 7 years but then adjusts annually after that. But there are also 3, 5, and 10 year ARMs available. The longer the time period before the initial rate adjustment, the higher the interest rate is. You’ll find that you can get an ARM with a down payment as low as 5% up to $647k, and above that you’ll be putting down 10% or 20%.
ARMs, more often than fixed rates, can often come with points. Learn more about points here.
I think an ARM can be worth considering if you plan on selling the home before the interest rate adjusts. Want to learn more about calculating an ARM adjustment? Click here.
If you may stay longer than the initial adjustment or may convert your home into a rental, then I would instead recommend a fixed rate. You may choose a fixed rate also for its greater flexibility with mortgage insurance. Lender paid mortgage insurance won’t be an option on an ARM.
Buyers consider applying for an adjustable rate mortgage (ARM) for a few reasons:
- They feel comfortable with the idea that rates may rise in the future, and are willing to take on that risk in exchange for near-term interest rate savings
- They don’t plan on holding the loan for a long time…either through selling the property or aggressively paying down the balance.
- The interest rate savings are enough of a monthly payment drop to take on the risk, and they’re comfortable with the rate/monthly payment rising in the future in order to have more affordability now. It’s for this reasoning that ARMs were so common in 2003-2007 but are no longer.
You may find this link helpful in learning more, which is a detailed disclosure from the government about ARM loans: https://files.consumerfinance.gov/f/201401_cfpb_booklet_charm.pdf
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