What is an ARM and is it right for you?

[pianoman9701]

What is an Adjustable Rate Mortgage and is it right for you?

In the not-too-distant past, some lenders used ARMs irresponsibly, selling the benefits of the lower initial rate without emphasizing the possible rate increases. ARMs were part of the reason so many people walked away from their homes in 2008. Because of that crash, laws have been tightened and disclosure is more specific on all mortgage products. Not only that, but a borrower taking our an ARM is required to take a class to make sure they're going in with their eyes open. These are only a few of the positive changes that have resulted from the crash.

An adjustable-rate mortgage (ARM) is a mortgage with an interest rate that can fluctuate periodically based on the performance of a specific benchmark. ARMs usually have a lower initial interest rate than a fixed rate loan. ARMs generally have caps that limit how much the interest rate and/or payments can rise per year or over the lifetime of the loan. An ARM can be a smart financial choice for homebuyers who are planning to keep the loan for a limited period of time and can afford any potential increases in their interest rate.

Right now, even though rates have risen, they're still at historic lows. If you're buying a home that you plan to keep, this is still a good time to get a conventional, fixed-rate mortgage. However, for people who move a lot for work, are in the military, or know they're going to need to get a bigger or smaller home shortly because of changing family dynamics, an ARM can save you money over the short term.

Let's give you an example on a 5/1 ARM with a 2/2/5 cap. How does this breakdown? The first number is the number of years that the loan rate doesn't change. The second number is the frequency of changes. So, in this case, the rate stays unchanged for 5 years and after that the rate can change once each year. The cap works like this: The initial cap is 2. So, the first increase can't exceed 2%. The second number, also tells you that subsequent yearly increases can also be as high as 2%. 5, the last number in the cap is the maximum the loan can increase over the life of the loan.

If you're going to need a mortgage, we can spend 15 minutes together on the phone and on rough numbers from you, I can give you different options that are determined by your future plans, income, and expenses. An ARM might be one of those options. I hope to hear from you!
John Wallace
360-771-1914

[fly-by]

People generally overpay for the security of a 30 year fixed rate loan when it is highly unlikely they stay in the house that long.  This is particularly true for younger homeowners. I've always used ARMs, some floating monthly. Though painful for brief periods it's been a good long term strategy.

[pianoman9701]

People generally overpay for the security of a 30 year fixed rate loan when it is highly unlikely they stay in the house that long.  This is particularly true for younger homeowners. I've always used ARMs, some floating monthly. Though painful for brief periods it's been a good long term strategy.

The average person will get a new mortgage in 4 years, either changing homes or refinancing. As the rates continue to rise towards the Fed's change expected around March, the difference in rate between fixed and ARM will grow.

[Stein]

It's been a good ride, I doubt banks will pay negative interest so best case it stays low for as long as you want to keep the house.  When rates go up, it typically coincides with a contracting economy and people out of work which could be challenging to refi your way out. 

I agree with Piano, it's a great time for a fixed rate loan.  In fact, historically pretty much the best time in modern history.  Rates are low and inflation is high, can't get a better reason in my book.