If you’re considering buying a home or refinancing your current mortgage, you may have heard of adjustable rate mortgages (ARMs). ARMs can be a good option for some borrowers, but it’s important to understand what they are and who might benefit from them.
What are adjustable rate mortgages?
Adjustable rate mortgages (ARMs) are a type of home loan that has an interest rate that changes periodically over the life of the loan. This is in contrast to a fixed rate mortgage, which has an interest rate that stays the same for the entire term of the loan.
ARMs are typically structured with an initial fixed rate period, during which the interest rate stays the same. After the fixed rate period ends, the interest rate will adjust according to a specific index, which is usually tied to a financial benchmark such as the LIBOR or the Treasury index. The adjustment period can vary depending on the loan terms, but is typically every 1, 3, or 5 years.
So, who might benefit from an adjustable rate mortgage? Let’s take a look at some key factors to consider:
- Lower initial payments: Since the initial fixed rate period typically has a lower interest rate than a fixed rate mortgage, your monthly payments will be lower during that time. This can be helpful if you’re just starting out or if you have other financial obligations to manage.
- Short-term ownership: If you’re planning on owning the property for a relatively short period of time (say, 5 years or less), an ARM may be a good choice. You’ll benefit from the lower initial payments and won’t have to worry about the potential for the interest rate to increase later on.
- Flexibility: ARMs can be a good option for people who have variable income or who expect their income to increase in the future. If you think you’ll be able to handle higher payments later on, an ARM may give you more flexibility and allow you to take advantage of lower interest rates in the meantime.
However, there are also some potential risks to consider with ARMs. Since the interest rate can adjust over time, your monthly payments can become unpredictable and may increase significantly if interest rates rise. This can make budgeting and financial planning more difficult.
If you’re considering an adjustable rate mortgage, it’s important to work with a top rated mortgage broker or top lender who can help you understand the terms of the loan and the potential risks involved. A reputable mortgage professional will be able to answer your questions and provide you with guidance on whether an ARM is a good choice for your particular situation.
At Prime 33, we’re committed to helping our clients make informed decisions about their mortgage options. Our team of experienced mortgage brokers can provide you with personalized guidance and support as you navigate the home buying or refinancing process. Contact us today to learn more.
