February 19, 2021
When you’re shopping for a mortgage to purchase or refinance a home and considering your options, you may be wondering about an adjustable-rate mortgage (ARM). There are several advantages to an ARM. But before going into them, let’s answer the question: what is an adjustable-rate mortgage?
What is an ARM?
An adjustable-rate mortgage (ARM) is a mortgage in which the interest rate can change over time because of market forces represented by an index rate. Two key factors determine the ARM’s rate — an index rate and margin. The margin is typically fixed, while the index rate can change over the life of the loan.
Are there different types of ARMs?
Yes, some lenders have ARMs for VA Loans, along with other mortgage types. You may see different types of ARMs, such as:
● 3/1 ARM
● 5/1 ARM
● 7/1 ARM
● or more
The difference between a 3/1 and a 7/1 has to do with the term of the initial rate. For example, if you have a 3/1 ARM, your initial rate is locked in for three years. And then, the rate can adjust with the index rate every year after. Similarly, a 7/1 ARM is locked in for the first seven years.
What are the top reasons to get an ARM?
- Lower Initial Rates. Typically, an ARM has an introductory period. For example, a 3/1 ARM, where the first three years are locked in and might be lower than the going rate for a 30-year fixed mortgage. That’s especially the case for Jumbo adjustable-rate loans.
- More Housing Options. If you have a comfort level that your income may be increasing over time, taking a mortgage with a lower interest rate upfront might open the door to afford your dream home sooner.
- Low Rates. No Refinancing Costs. While ARMs are usually associated with the concern that your rate may go up over time – and they could. Rates can also go down over time. In this instance, when rates drop, and you are past your initial lock, your adjustable-rate mortgage payment will actually go down.
- Moving Soon. If you're likely to move in five-seven years and that the home you're looking to buy won’t be your forever home, an ARM may make a lot of sense. If ARM rates are lower than 30-year fixed, you can lock in the lower rate for five or seven years with a 5/1 or 7/1 loan. And before your rate changes, you might be moving to your next home.
- Rate and Payment Caps. Even though your rate may go up, there are likely built-in caps when you receive your loan. These caps act as a ceiling, so your rate and payment will never go higher than that amount.
Is an ARM right for me?
If you're deciding on whether to get a fixed-rate mortgage or an adjustable-rate mortgage, here are some questions you should consider asking:
● Do you need a conforming loan amount or a jumbo loan? Interest rates vary depending on the loan amount, so make sure you're looking at the correct rate. Jumbo ARMs can be lower than 30-year fixed.
● What are the current 30-year fixed rates for the loan size you need? You might also take a look at 15 and 20-year rates.
● What are the rates for adjustable-rate mortgages? Compare rates for 3/1, 5/1, 7/1, and 10/1.
● What are the current interest rate trends? Are rates on the rise, or are they falling? If they're high, ARM rates will probably look appealing. If rates are at historic lows as they are in 2020, it may make more sense to lock a fixed-rate mortgage to secure these low rates for the life of your loan.
● How long do you plan on staying in the home? As outlined above, if you plan to move in a couple of years, an ARM might be the right choice.
● Can you afford the mortgage if it goes up? If mortgage rates increase, can you afford to pay the new rates outlined in the mortgage caps?
● How frequently do the ARM rates adjust? Where do you see yourself at the end of the introductory period of 3-10 years? For example, if you're currently in the military and know you'll be relocating in a few years — consider that.
We hope you’ve found this information about adjustable-rate mortgages helpful. Assisting you in selecting the right home loan is our top priority. Our specialists in mortgage services can go over all of your options.
To learn more about PenFed loans or what loan is right for you:
● Call 866-386-7254
● Visit the Mortgage Center