Rates Are Rising – Why an ARM Is Still a Good Idea
What you'll learn: See how an adjustable-rate mortgage can save you money, especially during a rising rate environment.
EXPECTED READ TIME: 4 MINUTES
August 25, 2022
Interest rates appear to be on the rise after experiencing record-low mortgage rates in 2020 and 2021. You might think it’s risky to choose a mortgage with rates that fluctuate with the market, but we urge you to consider the possibilities. Adjustable-rate mortgages (ARMs) can still be a good idea in a rising rate environment. Let’s explore why.
Are you new to adjustable-rate mortgages? See everything you need to know about ARMs.
Take advantage of low introductory rates
Although your interest rate will change periodically with an ARM, your loan actually starts with a fixed-rate period – which is often three, five, or seven years – during which your rate doesn’t change. This initial fixed rate may be lower than you might receive with a fixed-rate mortgage – and that can lower your initial monthly payment. Definitely something to consider taking advantage of.
There are many reasons borrowers look for low interest rates. A low rate can mean:
- Reducing mortgage payments
- Paying less over the life of the loan
- Building equity faster
- Being able to purchase a higher-priced property
While it’s true your rate could increase once your fixed period ends and becomes variable, there are ways to lower that risk.
Avoid the risk of rate increases
Want to enjoy an ARM’s low intro rate while avoiding uncertainty of a variable rate? Here are three options to consider.
- Sell before the fixed-rate period ends. An ARM can be an excellent option if you don’t plan to own the property for the long-term. Real estate investors, people who fix and flip houses, and primary homeowners who sell every few years have all discovered ARMs as a smart financial tool. And with some fixed-rate periods lasting up to ten years, there’s plenty of time to find a buyer.
- Refinance before the rate becomes variable. Signing on the dotted line for a 30-year mortgage can feel like a huge commitment – and it is – but it doesn’t mean you have to keep that same mortgage for the full term. Refinancing has become extremely common, especially when rates start to fall or when an ARM’s fixed-rate period ends. Many borrowers prefer to lock-in at a comfortable rate, even if it’s higher than the intro rate, so they don’t have to worry about fluctuations for the rest of the loan term.
- Pay attention to rate trends. If you’re comfortable with some risk, you may prefer to stay in your ARM beyond the fixed-rate period. It’s possible that rates will be dropping when that time comes, and you could have substantial savings over the life of the loan. You could also sell or refinance when it seems rates start to rise again.
ARM vs. fixed-rate loan example
Consider the following example showing potential interest rates over the course of a 30-year ARM and conventional fixed-rate mortgage. While the fixed rate stays steady for the entire term, the ARM fluctuates up and down after its initial five-year fixed period. Depending on which way the rate goes, it could mean significant savings (or additional costs) for the borrower throughout the life of the loan.
|7/1 ARM||30-Year Fixed|
|Rate After 7 Years||5.00%||5.00%|
|Rate After 29 Years||3.125%||5.00%|
Is an ARM right for you?
With interest rates on the rise, many homebuyers are considering the potential savings available with adjustable-rate mortgages. ARMs are not as straight-forward as conventional mortgages. Enlist the help of an experienced loan officer to help you weigh your options.