Adjustable Rate Mortgages (ARM)s: A Better Fit Than Fixed Rate Mortgages?
Buying a home is a step in the right direction for your personal finances, but it can be intimidating if you don’t know all of the options. 30-year fixed mortgages were once believed to be the “Gold Standard” of mortgage lending, but sometimes there may be a better product for your situation. In this article, we will give you an overview of what a fixed-rate mortgage is, what an adjustable-rate mortgage (ARM) is, and which loan could be right for you.
WHAT IS A FIXED-RATE MORTGAGE?
Fixed-rate mortgages have the security of keeping the same interest rate (and payment) for the life of the loan, with the most common terms being 10, 15, 20, or 30-year terms. This security comes at a cost to you. Due to the length of the loan, a 30-year fixed-rate mortgage has the highest interest rate.
Before you settle into a loan with a high-interest rate, ask yourself the following questions:
- Do I plan on staying in this home for 30 years?
- Do I want to stay with this loan for 30 years without refinancing?
If the answer to one of these questions is, no, then you will want to continue reading.
WHAT IS AN ADJUSTABLE-RATE MORTGAGE ARM?
An adjustable-rate mortgage has a rate than can adjust based on the terms of the loan. ARM loans have an initial period where the rate remains the same, with these periods ranging from one year to seven years or more.
Terms are normally notated as such: 5/1. The first number represents the term in which your initial rate will stay the same. The second number represents how often your rate may adjust, in this instance, it may adjust up to one time a year. The interest rate can increase or decrease based on the current market conditions.
WHAT ARE THE ADVANTAGES OF AN ARM?
Adjustable-rate mortgages start at a lower rate than fixed-rate mortgages. If you plan to be in your home for a short period of time, you can take advantage of a lower initial interest rate. An adjustable-rate mortgage also offers the flexibility of a lower payment while you move to a better financial position.
HOW DO I KNOW WHICH LOAN IS RIGHT FOR ME?
A fixed-rate mortgage means your principal and interest payments will stay the same every month, through the life of your loan. A higher rate on your fixed-rate mortgage does mean that you could miss out on falling interest rates, and miss savings on the initial low-interest rate.
In the current market of 2022, fixed-rate mortgages carry a higher interest rate than we’ve come to expect. You can take advantage of the lower rate on an ARM with our 1/1, 3/1, and 5/1 ARM loan program options below. Rates are expected to rise and are subject to change at any time, so get started today.
EXAMPLES OF SAVINGS (valid as of 4/14/2022)
1/1 ARM | 2.50% interest | 4.863% annual percentage rate (APR)*
Monthly for 1st year: $612.15
Total 1st year: $7,345.80
*Based on a $540,000 purchase with 20% down. P&I monthly payment of $1,706.92 vs. 30yr fixed at 5.00% interest with a P&I monthly payment of $2,319.07. Annual percentage rate (APR) of 4.863
3/1 ARM | 2.75% interest | 4.555% annual percentage rate (APR)*
Monthly for 3 years: $555.47
Total 1st 3 years: $19,996.92
*Based on a $540,000 purchase with 20% down. P&I monthly payment of $1,763.60 vs. 30yr fixed at 5.00% interest with a P&I monthly payment of $2,319.07. Annual percentage rate (APR) of 4.555
5/1 ARM | 3.00% interest | 4.357 annual percentage rate (APR)*
Monthly for 5 years: $497.74
Total 1st 5 years: $29,864.40
*Based on a $540,000 purchase with 20% down. P&I monthly payment of $1,821.33 vs. 30yr fixed at 5.00% interest with a P&I monthly payment of $2,319.07. Annual percentage rate (APR) of 4.357
*Available on rate-term refinances and purchases of single-family owner-occupied residences only. Cannot be combined with any other offer. The rate can adjust up to 2% at each adjustment, every year after the initial fixed period of 1yr, 3yrs, or 5yrs and no more than 5% above the initial start rates. Adjustments are based on a margin of 3.25 + the 1yr treasury index. Min. credit score of 680 required. Additional adjustments may apply for condos. The maximum Loan to value is 90%. Rate current as of 4/14/2022 – subject to change.