The current average interest rate is at a historic low, making fixed rate mortgages appealing. However, some borrowers are better suited for an adjustable rate mortgage (ARM), which is explained here. An ARM is a mortgage in which the interest rate changes periodically, usually in relation to indexes and margins that are determined by the state of the economy. Payments go up or down accordingly.
Adjustable Rate Mortgage Quick Facts
- There are 3-,5-,7- and 10- year adjustable-rate mortgages
- ARMs transfer to the borrower a portion of the risk associated with the economy
- In exchange for sharing the risk, ARMs offer borrowers initial interest rates that are substantially lower than fixed rate mortgages
- ARMs can be structured in ways that make rate increases more predictable for borrowers
- Interest only loans are an option for some
Adjustable Rate Mortgage Pros and Cons
Why would you want an adjustable rate mortgage? An ARM generally carries a lower initial interest rate that allows them to more easily qualify. The lower interest rate means that for the first few years, an ARM would be less expensive than a fixed rate mortgage. Sometimes, an ARM is less expensive over the long term than a fixed-rate mortgage – for instance, if interest rates remain as low as they are or drop further.
However, these advantages must be weighed against the risks you would assume. With an ARM, there is a near-guarantee that your interest rate would increase in the future, leading to higher monthly mortgage payments. Our Orange County mortgage brokers can structure these loans in a manner that makes rate increases slightly more predictable, but borrowers must be prepared for those increases in advance.
Is an Adjustable Rate Mortgage for You?
An adjustable rate mortgage is sometimes the best option for borrowers who are in a sticky lending situation. However, those borrowers must be prepared for potential interest rate increases, which mean an increased monthly mortgage payment. If your income is substantial enough to bear this added expense, then you may be a good candidate for an adjustable rate mortgage.
Home Loan Solutions is a trustworthy, ethical lending institution that is committed to finding the best loans for our borrowers. We do not carry out unethical, pre-2008 lending practices that dished out adjustable rate mortgages to borrowers who were not prepared to make their payments. Instead, we offer adjustable rate mortgages as an option to borrowers who are good candidates for homeownership, but need a lower interest rate due to their specific lending circumstances.
To learn if an adjustable rate mortgage is right for you, contact Home Loan Solutions today. An Orange County mortgage broker will be glad to discuss this option with you.