This BLOG On ARM Versus Fixed-Rate Mortgage Home Loan Programs Was Updated And Published On November 19th, 2020
ARM stands for an adjustable-rate mortgage.
- Adjustable-Rate Mortgage is when the mortgage interest rate of the loan is not fixed for the 30-year term
- The mortgage interest rate is fixed for the initial rate period:
- which is normally 3 years, five years, seven years, or ten years
- After the fixed-rate period has elapsed, it may change depending on the movement of the index the loan is based on
- Fixed-Rate Mortgages are loans that have the same fixed rate throughout the term of the loan
- For example, on a 30-year fixed-rate mortgage, the interest rate will remain constant throughout the entire 30-year term of the loan
In this article, we will cover and discuss ARM Versus Fixed-Rate Mortgage Home Loan Programs.
Mortgage Rates On Adjustable Rate Mortgages
The adjustable-rate mortgage that is normally quoted is the initial start rate of the lender.
- This rate is good for the initial rate period of a certain amount of years
- Adjustable rate mortgages is fixed for an initial number of years
- Normally the initial fixed period is either 3 years, 5, years, or 7 years
- After the initial fixed rate period, the mortgage rates will adjust every year
- The new rate will be based on a fixed margin plus the index
- Adjustable rate mortgages benefit borrowers who do not plan on keeping the home for the life of a 30-year fixed rate mortgage term
Normally, first time homebuyers buying a starter home can benefit from adjustable rate mortgages.
Here Is How Mortgage Rates Work
The mortgage rates are higher if the fixed-rate period is longer:
- For example, a 3/1 has a lower rate than a 10/1
- ARM interest rates are generally lower than 30 year fixed rate mortgage interest rates
This is because the lender is not tied down to a 30-year lock on a specific interest rate and is only liable for a certain time frame.
Strategies Using Adjustable Rate Mortgages
Homeowners who intend on only staying on their home purchase for ten or fewer years, especially first time home buyers, should consider an adjustable-rate mortgage versus fixed-rate mortgage:
- This is due to lower interest rates
- Borrowers who have lower credit scores due to their low credit are getting higher interest rates
- Borrowers intending on refinancing in the future after their credit profile increases should consider an ARM versus a fixed-rate mortgage
- Homeowners not sure on how long they intend on staying on their home purchase, their decision will determine the amount of savings the ARM product has versus the fixed-rate mortgage
Loan officers can go over each individual case scenarios with borrowers on which mortgage product is best for the borrower.
Rate Adjustments Over Course Of ARM
Borrowers of adjustable-rate mortgages need to consider the mortgage rates once the initial start rate period is over.
- Once the initial starter fixed-rate period is over, the interest rate will adjust each year for the remaining 30-year term of the loan or the term of the loan
- Most lenders offering adjustable-rate mortgages will have a 30 year amortized term
There are commercial lenders that will amortize it over 15, 20, and 25 years.
How Do ARMs Work
Here is how mortgage rates adjustments work on adjustable-rate mortgages
- The adjustment rate is based on the index PLUS margin
- The margin is a fixed number
- The index is what changes and determines the new mortgage interest rates
- Lenders decide on what index they base their ARM products
Whatever the index is plus the margin will be the newly adjusted mortgage rate.
Analyzing Adjustable Rate Mortgages (ARM)
Here is how adjustable-rate mortgages are analyzed:
- Value of the index and rate
- Add the margin to the index
- Adjustment rate period is after the fixed-rate period is over
- Add margin to the new index and it adjusts every year for the duration of the term of the loan
- There is a cap on the interest rate adjustment which limits the size of the interest rate changes plus maximum interest rate over the life of the mortgage
There are pros and cons with going with Adjustable Rate versus fixed-rate mortgages. Borrowers who have any questions on which mortgage products are better for them and benefits them more, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at firstname.lastname@example.org. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.