Mortgage rates for a 30-year fixed are at an all-time high according to Mortgage News Daily, rates not seen since 2009. Meanwhile, the rate for an ARM loan is a percent or more lower. Today, knowing when an ARM loan is a good idea is more important than ever. As an agent navigating your clients through uncertain financial times, you need to understand Adjustable Rate Mortgages and how they will affect buyers. When considering an Adjustable Rate Mortgage, keep the following three factors in mind:
The Timeframe of an ARM Loan
The most important part of knowing when an ARM loan is a good idea comes down to timing. ARM loans generally have three, five, seven, and ten-year periods. The readjustment period could be one year or six months, which would look like 7/1 or 7/6, for a seven-year ARM. Meaning, that the loan is for seven years but the interest rate will be reevaluated in one year or six months.
The Interest Rate Cap of ARMs
There is a maximum amount the rate can increase….or decrease. There is also a lifetime maximum cap. For example, if you have a 5% lifetime cap on your 5/1 ARM, your 4.38% rate could eventually wind up at 9.38%. Ouch.
Your Timeline vs. the ARM Fixed Rate
How long you intend to keep the ARM loan in place is ultimately the most important deciding factor. If you are wanting to buy rather than rent, but only plan to stay in the home for two to three years, then an ARM could be a good choice. Or, if you want to buy at a lower rate while you sell your current home, an ARM could be a smart move if you plan to pay off the ARM with the proceeds from the sale of your house.
Be sure you know how much higher the interest on your ARM loan could go up and what that will mean for your monthly payment and your budget. This definitely helps you figure out when an ARM loan makes sense.
During the mid-2000s, ARM loans were popular and relatively easy to get. Today, the underwriting process is much more stringent which makes them a safer option. But you still risk ending up with an interest rate that is substantially higher than a fixed-rate mortgage if you don’t plan accordingly. Anyone planning to stay longer than the term of the fixed rate on their ARM should stick with a traditional fixed-rate loan.
Finally, keep in mind that a fixed-rate mortgage in the neighborhood of 5% is still a pretty good buy. We have been living in such an era of cheap money over the last few years that people forget that loans in the 5s are still good rates. Plus, there is always the option of refinancing if rates get super low again, so if you’re able to get into a home sooner rather than later, that probably makes the most sense.