An Adjustable Rate Mortgage (ARM) ranks among one of the popular types of home loans in a highly competitive and red-hot housing market. If you plan to purchase a house or refinance your existing home, it's important to understand what an Adjustable-Rate Mortgage is and whether it may be the best option for you.
What are Adjustable Rate Mortgage Loans?
Often referred to as an “ARM,” an Adjustable Rate Mortgage is a type of home loan structured to adjust over time based on current interest and market conditions. Typically these types of home loans start with a lower fixed rate and after a specified time period the rate adjusts on a monthly or yearly basis. Depending on market conditions, your interest rate could go up or down.
What's the Difference Between 5/5, 7/7, and 10/10 Adjustable Rate Mortgage?
When you see terms such as 5/5, 7/7, or 10/10, this is telling you how long the initial fixed period will last and when the interest rate will adjust. For example, a 5/5 term indicates the rate is locked for five years. After the five-year term expires, the interest rate is recalculated every 5 years for the remainder of the loan. Thus, “5” years of fixed rates, followed by changes every “5” years. Longer terms such as the 7/7 and 10/10 options provide a longer fixed rate period and payment adjustment cycle.
When to Use Adjustable Rate Mortgages
Adjustable Rate Mortgages can be used to purchase a single-family house or to refinance a mortgage or a commercial property. Choosing an Adjustable Rate Mortgage provides homebuyers with significant benefits. They begin with an attractively low interest rate, favorable terms, and they offer easy online applications. In an environment where traditional home loan options are at higher interest rates, an Adjustable Rate Mortgage can provide maximum purchasing power and affordability.
First-Time Homebuyer
If you're a first-time homebuyer, there are a few reasons why an Adjustable Rate Mortgage might be a great option for you. Adjustable Rate Mortgages don't require a big down payment or private mortgage insurance making it an affordable option for you to become a homeowner. This home loan gives you competitive buying power and peace of mind in knowing your rate is locked for a set period of time.
The low interest rate during the introductory period can help reduce monthly expenses leaving you with extra funds for other meaningful activities or to prepare for your next adventure. Through regular and on-time monthly repayments, you will also experience a positive impact on your credit score, which can increase your borrowing opportunities in the future.
If You Plan to Move or Sell Soon
An Adjustable Rate Mortgage can be a good option for people who plan to move or sell in the next few years. If you're not looking to secure your forever home because you plan to start a family or anticipate career changes in the near future, securing this type of home loan positions you to be able to sell the property before the mortgage rate changes.
Rising Interest Rates
It’s difficult to predict whether the overall interest rate will rise or fall in the coming years. Borrowers have the flexibility and opportunity to decide whether to stick with the Adjustable Rate Mortgage or refinance if they believe interest rates will rise. The fixed interest years are a type of failsafe that helps with managing finances.
How to Determine if an Adjustable Rate Mortgage is Right For You
If you're unsure where to begin in the home buying process or are just looking for more information, be sure to contact us! We're happy to work with you to determine if an Adjustable Rate Mortgage is a good fit or if a different home loan option better suits your needs.
For more information and details, contact our Mortgage Service Department at 770.580.6098 or at mortgage@peachstatefcu.org. We offer competitive low interest rates, flexible terms, and easy online applications that are just a click away!
