Choosing the right Mortgage is a critical step in your homeownership journey. Understanding when an Adjustable Rate Mortgage (ARM) might be the best fit may save you money and provide the flexibility you need to achieve your financial goals. Here are four scenarios where choosing an ARM home loan could be the best decision for your financial strategy.
What is an ARM?
An ARM is a type of home loan where the interest rate can change throughout the life of the loan. Unlike fixed rate mortgages which have a consistent interest rate, ARMs have interest rates that adjust periodically based on market conditions.
With a fixed rate introductory period that typically varies between 5, 7, or 10 years, many homebuyers take advantage of the ARM's low interest rates during the introductory period for maximum purchasing power. After the introductory period ends, rate adjustments typically occur annually but can vary based on the loan terms. Be sure to check with your trusted local lender to see what ARMs they offer.
Don’t let the adjusting interest rate prevent you from considering this as a valuable option. Many ARMs have a maximum on interest rate adjustments or a ceiling of percentage points raised during any given year. Be sure to compare these important features when finding the perfect ARM for your house buying budget.
When to Use an ARM
Local lenders provide a variety of home loan solutions suitable for anyone looking to turn their dream of home ownership into reality. An ARM can help potential homebuyers comfortably manage their monthly Mortgage payments by offering flexibility and other financial benefits. Here are some scenarios where an ARM might be the optimal choice:
1. An ARM May Be Perfect If You Plan to Move
If you plan to relocate, or sell the home before the adjustment period of the loan, an ARM could be an excellent option for you. During this time, homeowners can enjoy the benefit of a lower monthly payment while paying less interest than they would with a fixed rate mortgage.
2. An ARM May Be Ideal When Interest Rates Are High
In a high interest rate environment, fixed rate mortgages tend to be higher than an ARM. This is because of the formula lenders use to calculate risk. ARMs usually offer lower rates than a fixed home loan because the formula for determining the risk of an ARM is different. Borrowers considering an ARM can enjoy a lower introductory rate, lower monthly payment, and added flexibility than they would with a fixed rate mortgage. This gives homebuyers more purchasing power to afford the home of their dreams.
To discover if an ARM is best for your budget, download our free checklist:
3. An ARM May Be Best If You Plan to Refinance
Common reasons for taking out an ARM include low rates and monthly payment, and added savings on interest during the introductory period.
A proven long-term benefit of an ARM is that you can refinance it and take out a fixed rate mortgage should rates drop. Other benefits for refinancing an ARM include reducing the loan term or accessing equity in the home. With having improved your cash-to-debt ratio, increased your credit score by making on-time monthly payments, and building equity in the home, you'll be better positioned to refinance into a fixed rate mortgage.
4. An ARM Can Improve Your Financial Health
It may seem counterintuitive, but an ARM can make you money. People who own their home are able to grow their wealth by increasing the equity in their home. That’s largely because a portion of the ARM payment goes toward the principal which increases your stake, or equity, in the property. Owning a home is a proven equity-building investment that improves financial health and security for your future.
For a quick comparison of ARM vs fixed rate Mortgages, check out this infographic.
Peach State Offers Competitive ARM Rates
If you're unsure where to begin in the home buying process or are looking for more information and options, be sure to contact us! We're happy to work with you to determine if an ARM is a good fit or if a different home loan option better suits your needs and goals.
For more information and details, contact our Mortgage Services Department at 770.580.6098 or mortgage@peachstatefcu.org. We offer competitive low interest rates, flexible terms, and easy online applications and pre-approvals that are just a click away!
Deciding on an ARM isn't the only big decision you need to make regarding home ownership. Get more facts to consider in our free guide, "How Much House Can I Afford in Georgia or South Carolina."
