Are you looking to buy a home and have concerns about the cost of a home and the current rate environment? If so, an Adjustable Rate Mortgage may be right for you.
WHAT IS AN ADJUSTABLE RATE MORTGAGE?
An Adjustable Rate Mortgage, commonly referred to as an ARM, is a loan in which the rate is variable for a portion of the loan period. In contrast, a fixed-rate mortgage has the same interest rate assigned for the life of the loan. An ARM will carry a lower rate for the initial period of the loan than a static fixed-rate loan. This option may help a borrower qualify for a larger loan amount or a more expensive home.
WHAT FACTORS SHOULD BE CONSIDERED?
At some point, an ARM rate will adjust depending on the terms of the ARM loan chosen. There are many ARM options available, and understanding the program is critical to knowing how the loan payments and interest rate may change over time.
What may seem like a good opportunity to get into a loan/home, may not be the best opportunity in the future if the rate environment changes and the adjustment period isn’t favorable to long-term financial goals.
Some things to consider may be, for example, if a consumer is looking to stay in a home for under five years, a 5/1 ARM or 7/6 ARM may be something to consider. In the first example, a 5/1 ARM, the initial portion of the loan would be in place for 5-years. The rates can then adjust according to the terms of the loan agreement every 1-year. A 7/6 ARM initial portion would be in place for 7-years, then the rate can be adjusted to the loan term every 6-months. If the goal of being in a home less than five-years is attained, the fluctuation of the rates after the introductory period would not be a concern; however, if the goal is not achieved, the fluctuating rate may cause budget constraints if the consumer is not prepared for a rate and payment increase.
WHAT ARE SOME BENEFITS OF AN ARM?
-
Lower initial rate
-
May increase buying power
-
Lower initial monthly payment
HOW DOES ONE BEST RESEARCH AN ARM PRODUCT?
Reviewing options with your preferred lender is a great place to start when considering financial opportunities and goals. Partnering with a lender who understands the consumers’ financial situation is critical to long-term success.
In addition to a review with a lender, there are many great resources available for consumers to do their own research. The Consumer Finance Protection Bureau has many financial resources that may benefit a consumer looking for education, including an in-depth section on Adjustable Rate Mortgages. These resources can be accessed by visiting ConsumerFinance.gov and searching for Adjustable Rate Mortgages or ARM loans.
Knowing what factors can impact the interest rate is critical to understanding the changes that may occur in the future and the potential impact on future payments. Reviewing all disclosures and thoroughly reviewing the terms of an ARM loan with your lender is crucial to making the best decision.
To review your financial opportunities and goals reach out to the Loan Professionals at First Federal Bank, BankFirstFed.com
"An Adjustable Rate Mortgage, commonly referred to as an ARM, is a loan in which the rate is variable for a portion of the loan period. In contrast, a fixed-rate mortgage has the same interest rate assigned for the life of the loan."