An adjustable rate mortgage (ARM) is kind of what it sounds like. Your mortgage is going to adjust throughout time. Most people choose an adjustable rate mortgage because they can typically get a better interest rate at the beginning. However, the rate will change through time, meaning that your mortgage will be a different amount each month. This can be hard for those who like to know what their expenses are every month.
Before you decide if an adjustable mortgage is right for you, you need to learn some of the terms of the mortgage. Here are some things that you should know.
Your ARM will come with numbers, such as a 5/5 or a 10/1. The first number is how long your interest rate is going to be fixed. For a 5/5, it will stay the same for five years. For a 10/1, it will stay the same for ten years. The second number then tells you how often your rate will change (after the first number). For a 5/5, after five years, your interest rate can change every five years. For a 10/1, it can change yearly after ten years.
There may also be a cap with your ARM. There are several types of caps that you may need to look at.
- Your initial adjustment cap will define how much higher or lower your rate can go up after the first five to ten years (or whatever terms you have for your ARM)
- The subsequent adjustment cap defines how much higher it can go up every time. This may be one or two percent every one to five years (depending on the terms). Over time, this can really add up.
- Then, you will have a lifetime adjustment cap. This signifies how much higher your interest rate can go up. If your rate can go up two percent every five years, then in twenty years, you are looking at paying significantly more for your mortgage. However, a lifetime adjustment has a limit on how much your loan can go up over time
Because this can seem daunting to most people, they stick to a fixed-rate mortgage. That being said, there are many benefits of going with an ARM. Some of these include:
- You can get a better deal off the bat. Those who get an ARM typically start their loans off with a better interest rate. This means that they can put more money toward their principal at the beginning of the mortgage.
- You might even be able to afford a better home. Since the interest rate is less, you may be able to afford a more expensive home for the same price per month as a cheaper one.
- You won't have to refinance in order to get a better loan. Many people who buy homes often refinance at least one or two times in order to make their payments more affordable. However, if you have an ARM, you can just wait and watch your rate go down as the market does.
- It works well for those who don't plan on staying in a home. If you are buying a starter home, and you know that you won't be there more than five to ten years, you might want to take advantage of better terms. It won't matter if the rate goes up, and you have to pay more, because you will be ready to move on by that time.
Not sure what is right for you? Don't hesitate to contact one of our local lenders to discuss the types of mortgages to see if an adjustable rate mortgage is right for you. We would be happy to talk to you about all of your options to make sure that you are satisfied with the loan that you get!