Adjustable Rate Mortgage 101
Ready to buy a house? The first step in the home buying process is choosing the right mortgage to fit your needs. When you get a mortgage, you can choose a fixed rate or one that may change. While fixed rate mortgages keep the same interest rate and payment for the life of the loan, adjustable rate mortgages, or ARMs, have fluctuating rates that may change after a predetermined period of time. Your rate could either increase or decrease depending on economic factors at the time. We’re here to help you understand adjustable rate mortgages so you can determine if an ARM is right for you.
What is an Adjustable Rate Mortgage?
An Adjustable Rate Mortgage, or ARM, is designed so that the interest rate can change over the life of the loan. An ARM starts out with a fixed interest rate which lasts for a set period of time, and then the rate will adjust up or down after the initial term. The time periods for which the initial interest rate lasts and when the rate adjusts after that will vary depending on the specific loan type. The rate may increase or decrease over time when these checkpoints are reached, depending upon the market rates at that time. The exact amount the interest rate may change by at these intervals is determined by a benchmark index rate and is typically capped at both a high and low end.
How Does an Adjustable Rate Mortgage Work?
You will see adjustable rate mortgages listed with a series of 2 numbers separated by a slash mark, like #/#. The first number indicates the number of the years that you will pay the initial fixed rate. The second number indicates the frequency that the rate will be adjusted after the initial fixed-rate period expires. For example, a 5/5 ARM would keep the initial fixed interest rate for the first 5 years of the loan, and then the rate would adjust every 5 years after that. Your monthly payment would increase or decrease as the rate changes.
What Are the Benefits of an Adjustable Rate Mortgage?
- Flexibility – Plans change, and an ARM makes it easier to accommodate changes in life than a traditional 15-30 year fixed rate mortgage. The average homeowner stays in one home for only 8 years before moving. So if you upgrade to a home with more space, change cities for a new job, or move to be closer to family, odds are that with an ARM, you might be on the move before your fixed rate period ends.
- Low starting rate – ARMs typically have lower starting rates than a fixed rate loan.
- Lower monthly payment – Because of the lower initial interest rate of an ARM, your monthly mortgage payments will generally be lower than with a traditional fixed rate mortgage.
- Lower income to mortgage payment ratio – Due to the lower interest rate and lower monthly payments, you will be dedicating a smaller portion of your overall income to your mortgage and housing costs, thus freeing up more space in the rest of your budget.
Other Benefits of an Adjustable Rate Mortgage
- Competitive rates
- Low closing costs
- Quick closings
- Local in-house processing, underwriting, and servicing
How Do I Know if an Adjustable Rate Mortgage is Right for Me?
- If you don’t plan to stay in the home for a long time
- If you want or need a lower payment
- If you think interest rates will go down in the future
- If you will be able to pay off a large portion or even all of the loan quickly
- If you are expecting significant income growth over the next few years
Next Steps
- Visit our Mortgage Loan Center to learn more about the mortgage process.
- Use our Home Buying Calculators to get a picture of what your mortgage will look like.
- Watch our Buying a Home video series on YouTube.
- If you’re ready to apply for a mortgage loan, let our team help you get the loan you need! Apply for a mortgage loan online or set up an appointment to speak with one of our Mortgage Loan Officers.
At Robins Financial Credit Union, our mission is to enhance the financial well-being of our members and community. We honor this commitment by providing educational content to help you make the most of your finances. Read our other blog articles to help you gain the financial knowledge you need to succeed.