Explaining Adjustable Rate Mortgages

Kevin Brierton – 10.8.2023

When it comes to mortgages, there’s a wide array of options to choose from, and one that often piques the interest of homebuyers is the adjustable-rate mortgage or ARM. But what exactly is an ARM, and how does it differ from the more traditional fixed-rate mortgage? Let’s break it down:

What is an Adjustable-Rate Mortgage (ARM)?

At its core, an ARM is a type of home loan where the interest rate isn’t set in stone. Unlike fixed-rate mortgages, where your interest rate remains constant throughout the life of the loan, ARMs come with interest rates that can fluctuate.

How Does an ARM Work?

The key feature of an ARM is its initial fixed-rate period. During this period, which typically lasts for a set number of years (e.g., 5, 7, or 10 years), your interest rate remains stable. This can result in lower initial monthly payments compared to fixed-rate mortgages, making ARMs appealing to some borrowers.

However, here’s the twist: Once the initial fixed-rate period ends, the interest rate on your ARM can adjust periodically. This adjustment is usually annual, but it can vary depending on the terms of your loan. When the adjustment occurs, your monthly mortgage payments can go up or down based on the changes in the chosen index.

Why Consider an ARM?

Now, you might wonder why anyone would opt for a mortgage with a potentially changing interest rate. There are a few reasons:

  1. Lower Initial Payments: ARMs often offer lower initial interest rates, which means lower monthly payments during the fixed-rate period. This can be advantageous if you plan to sell the home or refinance before the rate adjusts.
  2. Short-Term Plans: If you only intend to stay in your home for a few years, an ARM can help you take advantage of the lower rates during the initial period without worrying about long-term fluctuations.
  3. Interest Rate Expectations: Some borrowers choose ARMs if they believe interest rates are likely to decrease or remain stable in the future, reducing the risk of significant rate hikes.

Adjustable-rate mortgages can be a suitable option for certain homebuyers, particularly those with short-term housing plans or those comfortable with some financial uncertainty. However, it’s vital to fully understand the terms of the ARM and its potential impact on your budget before diving in. I would love to have a conversation with you to determine which loan program might be best based on your specific financial situation and homeownership goals. Call me today!