Today we’re discussing adjustable-rate mortgages, or ARMs. This is a very popular loan product nowadays due to home values increasing over the past two years and the rising interest rates in 2022.
An adjustable-rate mortgage is a loan that’s amortized over 30 years, making it very similar to a 30-year fixed loan. However, your initial rate is only fixed for a specific period, like five, seven, 10, or 15 years. If you took out a five-year ARM, your initial rate on that mortgage would only be fixed for five years even though you’re making payments spread out over a 30-year term.
A lender is willing to give you a lower rate on that loan because they’re only committing to that rate for five years. Typically, rates on an adjustable-rate mortgage are about 1% less than a 30-year fixed mortgage. What I love about the program is that it starts the borrower with a lower monthly payment. If rates organically drop within the next five years, you could refinance into a 30-year fixed rate and never pay that higher interest rate.
“Rates on an adjustable-rate mortgage are about 1% lower than a 30-year fixed mortgage.”
The terms on adjustable rates extend out to either seven, 10, or 15 years. Historically, many borrowers believed adjustable-rate mortgages were risky loans — once the fixed rate was over, the rate would go up significantly. While there is a potential for that to happen, it’s also possible that the rate will improve.
Nowadays, ARMs are being used by borrowers purchasing a primary residence or a second home, as they aren’t currently available on investment properties. I want to note that they require a larger down payment, but you’ll save about 1% on your rates. For example, you’ll need to put 20% down in order to get an excellent rate on a primary residence and 30% to qualify for an ARM on a second home.
Thank you so much for watching this video! This is Myron Chamberlain at Prime Lending. If you’d like more information about adjustable rate mortgages or anything mortgage-related, contact us by call, text, or email.