What Is An Adjustable-Rate Mortgage: ARM

What Is An Adjustable-Rate Mortgage: ARM

In this blog, we will discuss and cover what is an adjustable-rate mortgage or ARM. As mortgage rates keep on rising, the topic of mortgages is still on everyone’s mind. In this article, we are going to move away from fixed-rate mortgages and look into what an adjustable-rate mortgage or ARM is.

What Is An Adjustable-Rate Mortgage Versus Fix-Rate Mortgages
What Is An Adjustable-Rate Mortgage Versus Fix-Rate Mortgages

Contrary to a lot of popular opinions, it may be a good time to get an ARM loan when everyone wants to push you into a 15-year or a 30-year fixed-rate more.  Not every borrower’s financial and income situation is the same. You really need to evaluate what you are trying to do and what your future holds. Compare a fixed-rate versus an adjustable-rate mortgage and see which loan program is best for you.

Comparing Rates On Adjustable-Rate Mortgage Versus Fixed-Rate Mortgages

If you have read our previous blogs, you may have read articles about increasing mortgage rates.  The fact of the matter is lately we have seen a run-up in mortgage rates that we have not been witnessed in many years.  An Adjustable-Rate Mortgage can come into play during a hot housing market with rising home prices and skyrocketing mortgage rates. ARMs generally have lower rates than fixed-rate mortgages.

15 Year Mortgage ARM

Let me preface this article by saying that if you are indeed thinking on dumping your 30 year mortgage for the 15 year variety, you need to make sure you do your research and are committed to your new loan.  There many Reasons To Consider 15 Year Mortgage and this article will highlight 3 of these reasons and try to give you a lot of insight in what it takes to thrive with a 15 year mortgage as well as the benefits involved.  If it is possible for you to cut your repayment time in half and save thousands upon thousands of dollars in interest paid, would you do this?  Most people would jump at the opportunity to take on a 15 year mortgage, but it definitely isn’t for everyone.  The following Reasons To Consider 15 Year Mortgage will play a vital role in your decision making.

Reasons To Consider 15 Year Mortgage

As just mentioned, one of the main advantages for a 15 year mortgage, if you can afford it, is the amount of money you will save over the course of the loan versus a 30 year mortgage.  Let’s look at the numbers and you can see exactly what I mean.  For these calculations, let’s factor in a $200,000 mortgage at a 4% interest rate calculating principal and interest.  If you were to make all your payments for a 30 year loan, you would end up paying $343,739 for your $200,000 loan.  On the flip side, the 15 year loan would only require paying $266,288 over the course of the loan.  The 15 year mortgage will end up saving you over $75,000 AND your loan is paid off in half the time.  If you can afford the higher payment of $524 per month, this would work for you.

15 Year Mortgage and Retirement Benefits

If you plan on retiring in 20 years or less or want to get a jump start on your life after retirement then a 15 year mortgage may be the right choice for you.  In getting or refinancing into a 15 year mortgage, you can rid yourself of a mortgage for your retirement years and focus more on living expenses and travel.  If you are still 20+ years from retirement, this can allow you to get rid of your mortgage payment in plenty of time before retirement and allow for even more savings to be had.  Getting rid of your mortgage payment can do wonders for your cash flow in retirement.

 Building Equity With 15 Year Mortgage

If you take the recent market trends with regards to home prices, it is no secret that home prices are on the rise, so what better way to maximize your return than by getting your house paid off sooner and your value increasing.  With a 15 year mortgage, you are developing equity twice as much every payment than with a 30 year loan and if your home is appreciating in value it’s like a win-win situation.  When the time is right you can downsize your home and buy something cheaper and smaller with a nice chunk of change left over to invest.

As you can see by reading the reasons I outlined, taking on a 15 year mortgage isn’t for everyone and if you have ambitions on refinancing into a 15 year mortgage then to start with you can always treat your existing 30 year loan as if it were 15 years.  You can always calculate the equivalent 15 year payment and pay that amount for 3-4 months.  If your finances aren’t affected tremendously by this, then you shouldn’t have an issue refinancing into a 15 year mortgage.  If you are looking to deal with a professional in refinances and 15 year mortgages, you need to contact me today and we can go over your entire situation.  If this isn’t the right program for you, we won’t do the loan, but it is always wise to see your options.

Case Scenario on How Adjustable-Rate Mortgage Works

Let’s take, for example, a 5/1 ARM, this means that for the first 5 years your mortgage rate stays the same. After five years, an adjustable-rate mortgage rate will adjust annually to the indexed market rate plus the margin of the ARM.  In most ARMs, you will get an introductory fixed period of 3 to 10 years. The rate stays fixed during the initial fixed-rate period of the adjustable-rate mortgage. Once the fixed period ends, your mortgage rate will adjust every year based on the index and margin.

Initial Fixed-Rate Period On Adjustable-Rate Mortgage
Initial Fixed-Rate Period On Adjustable-Rate Mortgage

The fixed-rate introductory period of your ARM is where you can see yourself saving a lot of money compared to the current market rates of mortgages due to lower initial fixed rates on ARMs.  With the savings from the ARM rate, it would be wise to pay down your principal so it will cut the term of the loan.

Paying Down Principal From Savings on ARM 

The additional principal paid monthly over the first 5 to 7 years can save you a lot of money once the ARM  mortgage adjusts down the road.  By doing this, you can prevent payment shock when your mortgage adjusts and you will not see an increase of a couple of hundred dollars.  You may still see an increase with this scenario, but since you have paid down additional principal, it is not as bad as you may think.

Adjustable-Rate Mortgage Benefit Starter Homebuyers

Another reason why an Adjustable-Rate Mortgage may be an option is if you plan on selling your home in the next 3 to 7 years. If you will be staying in the home you are purchasing for the long term, you may want to go with a fixed-rate mortgage.  If the answer is you intend to move in the short-term, then almost always an ARM may be more beneficial.

First-Time Homebuyers Needing to Upgrade to Larger Home in the Next Five Years

Adjustable-rate mortgage benefits first-time homebuyers buying a starter home or condo and selling in three to seven years to upgrade to a larger home in the next three to seven years. If you are single and fresh out of college buying your first home and using your first home purchase as a starter home, an Adjustable-Rate Mortgage is a great plan.

Adjustable-Rate Mortgage Ideal For First-Time Homebuyers Buying Another Home Prior To Adjustment of ARM

Chances are you will be selling your home before your rate even has a chance to adjust.  Another scenario where this will work in your favor is if you move frequently for work and want to purchase a home instead of renting for multiple years.  Knowing that you will be out of your home in a few years almost ensures that the right option for you is an ARM.

Adjustable-Rate Mortgage Solution For High Debt-To-Income Ratio Borrowers

If you are pressed with a higher than normal debt-to-income ratio or DTI ratio, you will notice that you may not be able to fit into mortgage guidelines going the fixed-rate mortgage route.  Since an adjustable-rate mortgage allows you to get a rate that is normally significantly lower than the market rate can save you hundreds per month on your mortgage payment which will lower your DTI ratio as well.  This extra $100+ savings per month can mean the difference between mortgage approval and a mortgage denial.

Adjustable-Rate Mortgage Benefit Buyers of Starter Homes

If you are a first-time homebuyer or a recent college graduate with an abundance of student loans, then trying to obtain as low a mortgage payment as possible is key to getting into a home to call your own and stop wasting your money on rent.

Comparing Adjustable-Rate Mortgage to Other Mortgage
Comparing Adjustable-Rate Mortgage to Other Mortgage 

As I mentioned earlier, an Adjustable-Rate Mortgage may not be the right option for everyone. It will not benefit homebuyers intending to stay in their homes for a long time. It will not benefit borrowers who don’t want to deal with their mortgage rate change

Is An Adjustable-Rate Mortgage The Best Loan Program for You?

An ARM is not the right loan for these folks.  If you fit into the categories mentioned above, an ARM loan should be your best bet.  If you are confident that an ARM is the way you should go, you need to calculate how long of an initial fixed-rate term you have before it adjusts. To ensure your fixed-rate period doesn’t end sooner than anticipated.

Calculate The Worst-Case Scenario Once The ARM Adjusts, You Have The Ability To Repay

The worst thing you can do is underestimate your fixed-rate term. You do not want to get stuck with years at an adjustable-rate mortgage. Once ARM adjusts, it may likely be higher than the rate you lock in today with.  If you are looking for a professional who will have your best interests in mind, contact us at Loan Consultants today at 844-275-2007. Text us for a faster response.  We can weigh your options out for you to ensure the ARM product is right for you.  We won’t force you into any loan. We will give you the tools and facts for you to make an educated decision.  This is one of the biggest purchases of your life and you need to treat it with the importance it deserves.  Call us today. One of our experienced loan officers will get you started to qualify and get pre-approved.

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