There are so many new terms to learn while you’re buying a home and shopping for the right mortgage. Last week, we told you a little about buy-down loans and how they work.
This week, let’s take a look at the adjustable-rate mortgage, commonly referred to as ARM.
These types of mortgages are especially popular when interest rates are higher. This is because it gives the borrower the ability to borrow money for a little cheaper for a short period of time. The borrower gets a lower interest rate than the current standard rate, and they get to keep that rate for a certain period of time. After that period of time, your interest rate will go up or down based on the rate at that time.
For example, let’s say the going interest rate on the market is 9 percent, and you get an ARM loan for 7 percent. Typically, the terms of the mortgage would say that you get the 7 percent rate for a year. After the year is up, the mortgage company would determine a new rate for your mortgage based on the current interest rates at the time. Usually, your new rate will be a little bit more than the current market rate because the lender, of course, still has to make a little bit of money on your loan so that they can recoup their costs.
That means the ARM rate you get as it changes may be a little higher than what the standard rate is at the time. But what the ARM does it allow you to have more buying power at the start of your mortgage so that you can buy a more expensive home or have your monthly payments be a little less. It gives you some flexibility.
Some buyers choose an adjustable-rate mortgage when rates are high so that they can get into the home they want now. They get the lower payment to start, but then they will refinance at some point when rates drop to convert their ARM into a fixed-rate mortgage.
We hope this gives you some insight into adjustable-rate mortgages and maybe sparks some questions. Your mortgage lender can tell you all you need to know about ARMs and how they work.