What is an Adjustable Rate Mortgage (ARM)?
An Adjustable rate mortgage allows your interest rate and principal to remain the same for a certain number of years (typically 5 or 15). After the pre-determined time has passed the rate can go up or down based upon the market at the time if you do not refinance your mortgage.
All adjustable-rate mortgages come with an initial interest that does not change for a certain period of time (one year, three years, five years or more). After the initial period ends, the ARM will adjust to it’s fully-indexed rate.
The ARM is considered a higher risk type of loan compared to traditional fixed rate mortgage, because your monthly payment may change significantly after the predetermined number of fixed years is up.
The adjustable rate mortgage is cheaper way to go if you know you are going to move or upgrade houses in the near future (1 – 10 years). This will allow you to enjoy the benefits of a lower interest rate and lower monthly payment.
Adjustable Rate Mortgage Benefits
- Interest rates on ARM are quite a bit lower than traditional 30 year fixed loans.
- Because the interest rate is lower, your monthly payment will also be lower… which allows you to qualify for more house.
- The ARM can free up short term finances due to the monthly payment saving you will enjoy through this type of loan.
Adjustable Rate Mortgage Qualifications
It’s easier to qualify for an ARM because the interest rate is lower than traditional 15 or 30 year fixed loans, thus making your monthly payment lower.
Also, lenders usually use the initial interest rate on the ARM to calculate the monthly payment, which helps lower your debt to income ratio, even though the ARM rate typically rises at the end of the initial rate period.
Ultimately, qualifying for an ARM is easier than traditional mortgages, but make sure that you have a plan in place prior to the load adjusting.
Who should get an Adjustable Rate Mortgage?
The best way to know whether you should consider an Adjustable Rate Mortgage is based upon how long you plan to own the home. If you are likely to sell your home within a couple years, there is a big upside with the ARM’s low monthly payments.
Also, the ARM is a great way to go if you think you can pay off the mortgage before the higher interest kicks in. Yes, we said higher interest rates because we are already at a historic low for interest rates and they are most likely going to go up.
Frank Perea is a mortgage broker based out of Midland, Texas and serves clients all throughout eastern Texas including: Odessa Texas, Monahans Texas, Big Springs Texas among others.