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3 Adjustable-Rate Mortgages and When to Consider Them

Are you buying your first home while interest rates seem shockingly high? Do you feel held back from taking that next step because renting seems more affordable than owning? Not sure if you’ll be staying put for longer than a few years before moving again?  Luckily, mortgage rates now have a bit more flexibility than you may realize.  Let’s look at some adjustable-rate options that might be perfect for you under the right circumstances.

What is an ARM?

Before jumping into the various options, let’s take a moment to learn and understand what an Adjustable-Rate Mortgage is, as it will be the basis of each option! An Adjustable-Rate Mortgage (ARM) is a loan with an interest rate that will change over time amortized over 30 years.  They usually have two distinct periods; the initial period which includes a fixed interest rate on your loan, and the adjustment period where the interest rate will change depending on the current market.  While this usually allows the borrower a lower interest rate in the initial period, this does allow for the possibility of that rate drastically changing during the adjustment period, and not always for the better.  It’s important to note that a cap is usually placed on the adjustment amount (both for increases and decreases).  For example, First Community caps at 2% change per adjustment and no more than 6% over the life of a loan.  The different types of ARMs will determine how long the initial period and adjustment periods last. 

5/1 and 7/1 ARM
Let’s start with the first two of multiple ARM options: the 5/1 and 7/1 ARM.  As mentioned with all ARMs, this rate is fixed for the first five or seven years, then going into the adjustment period, the rate will adjust yearly for the remainder of a total 30 years.  Again, with First Community this rate cannot be changed by more than 2% each adjustment period or exceed a 6% increase over the life of the loan and is often similarly capped by other lenders as well.  While the initial period might help get a lower interest rate than the standard fixed rate, it is important to remember that during the remainder of your loan, your monthly payment could either increase or decrease due to your rate now adjusting to the current market.  The adjustment period can ultimately be a gamble at its core, but there are still some refinancing options that can also help make ARM loans the perfect option for you. 

5/5 ARM

Similar to the 5/1 and 7/1 ARM loans, First Community offers an “Affordable Alternative Mortgage” option as a unique 5/5 ARM. This adjustable-rate mortgage has an initial fixed rate period of 5 years with an adjustment period every 5 years thereafter.   The difference here is that the rate will adjust every five years after the initial period rather than annually.  As with the 5/1 and 7/1 ARM, this rate cannot change by more than 2% every five years or exceed a 6% increase over the life of the loan.  This longer period between adjustments allows for more breathing room when budgeting, as your monthly payments will stay the same for five-year periods at a time without refinancing rather than changing yearly.  The 5/5 ARM does have a couple of drawbacks in comparison to the 5/1 or 7/1 ARM: not as many lenders will offer it, and you may end up with higher monthly payments for a longer period.  But First Community members can choose to refinance their loan into a fixed-rate loan product at any time. And, as always, First Community does not charge a fee for the application, processing, or underwriting.


When should you consider an ARM loan?

We’ve gone over some of the different variations of the ARM loan, along with what differentiates them from one another, but still have not answered the question: When should I consider applying for one of these loans over a fixed rate mortgage?  While the thought of a majority of your loan period adjusting to the current market’s rates might be a scary thought, there are a few standout reasons to ask your lender about an ARM.  Consider doing so if you only plan on staying in your home for less than five years.  The 5 or 7 year lower fixed rate period won’t change just because you aren’t going to be living in that same house for 30 years.  If you plan to sell that home before the adjustment period, consider taking advantage of the lower rates during the initial period.  Similarly, many people look to an ARM when interest rates are high during the buying process.  We can’t necessarily control the housing market, but we can take advantage of a lower interest rate if only for a brief period.  Consider taking advantage of the lower fixed rate period on an ARM, and then refinancing if you do not plan to sell.  Finally, consider an ARM if you are a first-time home buyer who can’t afford a fixed-rate mortgage.  While this last one should also take the first two reasons into consideration, first time home buyers may find it more difficult to afford everything that goes into buying a home.  Even a starter home can be difficult to purchase when there are higher interest rates and more of a demand for housing.  First-time home buyers should absolutely consider an ARM for their first mortgage because it could offer lower interest, making home buying more affordable.  First Community even offers a First-Time Home Buyer 5/5 ARM with no down payment.

With multiple mortgage loan options and several factors in play while house hunting, it may not always be obvious what financial route is the correct one.  Traditional fixed-rate and Adjustable-Rate Mortgages both have their place and should always be taken into consideration.  However, if you’re finding yourself looking for your next house, or even first house, and worried about the current interest rates, consider looking into one of many ARM loans!