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Is an Adjustable-Rate Mortgage (ARM) right for me?
There are always many options to help you buy a home!
If you are worried about rising interest rates and buying a home, there are options that offer a lower rate at the beginning of your mortgage. These lower rates are fixed for a period of time and after that, are capped as to how much they can adjust up or down. These are called Adjustable Rate Mortgages (ARMs) and are a good fit for some home buyers. To learn more about these programs, we have a downloadable that reviews how they work. click here
- Interest Rates may be high, so an ARM may allow you to qualify at a lower rate depending on the agency program.
- Property Investors like ARM programs to lower their monthly debt obligation compared to their rental intake. As rents go up over time, any change in payment can be justified.
- People who frequently relocate due to their job may find the lower rate more appealing.
- Fixed rates are high, and borrowers seek a lower rate/payment during the first years of their mortgage.
- It could make sense from a financial perspective. The average time a homeowner stays in their home is 7 years. So, the logic is, why pay for a 30-year mortgage at a higher rate when you plan to move in 5-7 years?
Today’s ARMs limit the payment shock when rates adjust, called Caps.
- Adjustment Cap: The Adjustment Cap is the highest a rate can go during an adjustment period.
- The Lifetime Cap: A Lifetime Cap means the interest rate cannot go any higher than the specified lifetime cap.
When the rate adjusts, and how much it can adjust depends on the program you choose.
- The first number is the length of the initial rate so that you can count on that interest rate for that number of years. This is also known as the initial term.
- The second number is how often the payments can adjust after the initial term.
→ 3/1 ARM means that the payment is fixed for the first 3 years and will adjust every year after the initial term.
→ 3/3 ARM means that the payment is fixed for the first 3 years and will adjust three years after the initial term.
source: Mortgage Currentcy