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5 Reasons to Get an Adjustable-Rate Mortgage (ARM)
What you'll learn: ARM advantages including low initial rates, potential savings, and rate caps.
EXPECTED READ TIME: 4 MINUTES
August 25, 2023
An adjustable rate mortgage, or ARM, is a mortgage in which the interest rate can change over time. With an ARM, your mortgage payment either goes down or up, depending on the current index rate your mortgage is tied to.
While having your rate be unknown over time can cause some anxiety, there are great reasons why you may want to consider an ARM when you purchase your home. In this article, we will cover five benefits of an adjustable rate mortgage and when one may make sense for you.
1. Lower initial rate and monthly payments
One of the most compelling advantages of an ARM is that the initial rate is almost always lower than a 30-year counterpart, leading to a lower monthly payment.
That is because ARMs start with an introductory fixed-rate period before they become variable. For example, a 15-year ARM has a fixed rate for the first 15 years of its term. The interest rate and initial payments are generally lower than those of a comparable 30-year fixed rate loan. You may choose to use that money to save for retirement, pay down other debt, or even pay down the mortgage faster.
2. Possible ongoing savings
Once you reach your adjustment rate period, your interest rate will fluctuate on a set schedule—often annually—based on the market. If interest rates drop, your payments will automatically drop. On a fixed rate mortgage, you would have to refinance to take advantage of a lower interest rate, which can be costly and time-consuming.
Just remember that the opposite can also be true. If rates rise, your monthly payments will also go up.
3. Rate caps limit risk
Adjustable rate loans will have caps on the rate at which they can increase, which means that even if your costs do go up, there is a limit. Be sure to pay attention to the terms of your mortgage disclosures to make sure these maximum increases are numbers you are comfortable with. Read all of your loan documentation and ask questions if you have any.
4. Flexibility to refinance or sell
Can you refinance an adjustable rate mortgage? Yes. And it is a common strategy for ARM borrowers nearing the end of their fixed rate period—especially if rates are on the rise.
If the home you are looking to buy will not your forever home and you expect to move in five to seven years, an ARM may make sense. If ARM rates are lower than a 30-year fixed mortgage, 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.
5. More housing options
If you feel confident 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. Be sure to run the numbers and ensure you do not put yourself into a position of financial hardship in order to buy more house than you can realistically afford.
When should you consider an adjustable rate mortgage?
If you are deciding on whether to get a fixed-rate mortgage or an adjustable-rate mortgage, here are some questions to ask yourself:
- What are the rates for adjustable rate mortgages? Compare rates for 3/1, 5/1, 7/1, and 10/1.
- 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.
- Do you need a conforming loan amount or a jumbo loan? Interest rates vary depending on the loan amount, so make sure you are looking at the correct rate. Jumbo ARMs can be lower than 30-year fixed.
- What are the current interest rate trends? Are rates on the rise, or are they falling? If they are high, ARM rates will probably look appealing. If rates are at historic lows as they were 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 few years, an ARM might be the right choice.
- How frequently do the ARM rates adjust? Where do you see yourself at the end of the introductory period of 3 to 10 years? For example, if you are currently in the military and know you'll be relocating in a few years, consider that.
- 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?
Everyone's financial situation is different. To decide if an ARM is right for you, you need to consider your financial situation combined with the state of the economy and other factors like how long you plan on being in your home. In the end, it is always great to do your homework, understand all of your loan options, and talk to a loan officer you trust.
SIMILAR ARTICLES
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Everything You Need to Know About ARMs
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Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.25 discount point, which equals 1.25 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
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