Five Advantages of an Adjustable-Rate Mortgage
If you need a mortgage or are looking to refinance an existing mortgage, you might consider an adjustable-rate mortgage (ARM) because they offer a favorable upfront interest rate. An adjustable-rate mortgage is typically a 30-year loan with an initial fixed rate for a set period (3 – 10 years), and then after that set period, the interest rate can go up or down based on the market. In other words, it adjusts every six months to a year for the remainder of the term. Let’s explore how an adjustable-rate mortgage might be worth the gamble versus a fixed-rate mortgage with predictable payments.
Predicting how interest rates fluctuate is nearly impossible, but an ARM may be a good alternative for some homebuyers. Here are a few advantages of an adjustable-rate mortgage.
1. You can lower your monthly payments. Although adjustable-rate mortgages have interest rates that go up or down based on the market, typically your initial payment will be lower than a payment on a fixed-rate mortgage. This savings is one of the biggest advantages of an adjustable-rate mortgage. For example, a 5/1 ARM means you have five years with a fixed interest rate, and after those five years, it switches to an adjustable interest rate for the remainder of the term. Check out the average savings on a $100,000, $200,000, and $300,000 mortgage.
Adjustable-Rate Mortgage (ARM) vs. Fixed-Rate Mortgage Average Savings*
*Based on rates as of June 2023. Examples are listed for illustration only.
2. You can allocate your extra savings towards debt or retirement. Since your initial payments are lower with an ARM, you have extra cash to pay off other debt, put into savings or add to your retirement plan.
3. You won’t see rates increase past the max cap. Adjustable-rate mortgages have a max cap on how much the rates and payments can increase after the initial fixed interest rate period. That said, be sure you’ve reviewed all the loan documentation, understand the fine print, and ask any questions you might have so you’re educated on the risks and what your payments, rate, and term may look like for the entirety of the loan.
4. You can see your payments drop when interest rates drop with the market. With an ARM, interest rates can increase or decrease with market conditions, so if interest rates fall and drive down the index where your ARM is benchmarked, you will also see the interest rate on your ARM drop. If you have a fixed-rate mortgage, you must go through the refinance process to take advantage of the interest rate drop, which can cost you more money and time.
5. If it’s not your forever home, save and sell before rates increase. If you’re not planning to stay in the house forever, you can plan carefully with your ARM loan and sell the house before the rate adjusts or increases after your initial fixed interest rate period. This strategy allows you to enjoy the initial low-interest rates of your ARM but also will enable you to sell before rates increase and help you to avoid paying higher monthly payments.
Are you on the fence about an adjustable-rate mortgage? Reach out to a ProFed team member today by calling us, visiting a branch, or scheduling an appointment online to help you decide which mortgage loan is right for you. Contact Us!