The advantages and disadvantages of using an adjustable-rate mortgage.
By now, everyone knows that interest rates are on the rise. As they climb, home affordability decreases, forcing buyers to reduce their price ranges or leave the market entirely. It’s only natural to be concerned about how rising rates will affect your plans, but there is a loan product that can help: adjustable-rate mortgages, or ARMs.
The vice president of economic and industry forecasting for the Mortgage Bankers Association recently said that more borrowers are utilizing ARMS to combat higher rates. The share of ARMs increased to 11% by number and 19% by dollar volume.
“It’s up to you to decide if the risk of higher payments is worth the lower initial rate.”
Why are more people choosing this loan product? These mortgages have a fixed rate for a set period, and after that, they can change. A 5-1 ARM will have a set rate for the first five years but can change once per year after that period ends. The advantage is that ARM rates are usually lower at the start of the loan than a conventional one.
The average rate for a 30-year mortgage was 5.09%, while the average ARM loan was about 1% lower. That may seem small, but even a 1% rate drop can lower your payment significantly. You could either get a lower monthly payment or buy a more expensive home without paying more per month.
However, ARMs come with their share of risks. They might start with low rates, but if interest rates rise after the initial fixed period, you could see your monthly payments increase. Your rate may also decrease, meaning you’d have to pay less per month.
It’s up to you to decide if the risk of higher payments is worth the lower initial rate. If you plan to move out of the home before the fixed period ends, you might never have to pay higher rates. You can also always refinance to a fixed-rate loan.
Speak to your local lender about your financial situation before deciding to use an ARM. If you have any questions or need recommendations for a reliable lender, call or email me. I’d love to help.