Planning to buy a home soon? Housing affordability is a common concern, so many homebuyers are exploring alternative options. One such option that is gaining attention is the Adjustable-Rate Mortgage (ARM). While ARMs have certain risks, they offer potential relief in a challenging market.
What is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage (ARM) is a home loan whose interest rate can vary over time. Initially, the interest rate is fixed for a set period, after which it adjusts periodically. For example, a 7/1 ARM has a fixed rate for seven years and then adjusts annually. Similarly, a 10/10 ARM has a fixed rate for ten years but resets every ten years after that.
Why Consider an ARM?
- Initial Affordability:
ARMs typically offer a lower starting interest rate compared to fixed-rate mortgages, which can make homeownership more affordable upfront. In a market where home prices have soared, locking in a lower rate can result in reduced monthly mortgage payments—bringing the dream of owning a home closer to reality. - Short-Term Security and Flexibility:
If you don’t plan on staying in your home for more than a few years or anticipate changes in your income, job, or family size, an ARM might be a practical choice. If your income rises in the next few years, you could pay down the principal or refinance into a fixed-rate mortgage. Alternatively, lower initial payments can give you more breathing room if life changes occur—like starting a family. - Interest Rate Caps:
Although ARMs carry risk, today’s tighter regulations provide some protection. Interest rate caps limit how much your rate can increase during certain periods, offering predictability and protecting you from drastic hikes in monthly payments. - Qualifying for a Larger Loan:
The lower initial interest rate on ARMs may help you qualify for a larger loan than a fixed-rate mortgage. This could be useful if you’re trying to secure a move-in-ready property in a competitive market or are looking at larger homes.
Connect for Guidance
While ARMs provide flexibility, potential savings, and short-term stability, weighing the risks is crucial. Before committing to an ARM, consult with People Driven Credit Union. They can help answer your questions, guide you through down payment assistance programs, and determine whether an ARM is the best option.
