People buy homes for different reasons. While there are some who intend to stay in their homes until they pay off their mortgage, others have different plans. They may decide to sell their homes after just a few years or build equity to invest in a rental property. It is for this reason that financial institutions offer another type of mortgage called adjustable rate loans or adjustable rate mortgages.
What’s the difference between adjustable rate mortgages and fixed-rate mortgages?
Fixed-rate mortgages have interest rates that do not change – it stays the same the entire life of the loan whereas an adjustable rate mortgage is the type of loan that begins with low-fixed interest rates and then it will adjust, depending on the real estate market.
Advantages of Adjustable Rate Loans
Adjustable rate mortgages are usually 30-year terms. These are mortgage loans that have variable rates, a loan with interest rates that adjust based on the market conditions. A homeowner who takes an adjustable rate mortgage will have lower fixed interest rates for a few years.
There are different types of ARM: 5/1, 7/1, and 10/1. The first number represents the number of years your fixed period lasts and the last number indicates the number of times your interest rate changes every year. A 5/1 adjustable rate loan has the same interest rates for 5 years and then it will adjust according to market conditions.
Why you need to apply for this type of loan:
- Payment Caps
Adjustable rate mortgages have caps that would limit increases in your mortgage rate. There is a cap on how much your interest rates can change when it adjusts and the total interest rate change over the lifetime of your loan. With an ARM, there are periodic and lifetime caps. A periodic cap is how much interest rates change during a given period, while lifetime caps can limit how much interest rates can change.
For example, let’s say you have a periodic cap of one percent annually. If the interest rates suddenly rose to 3% that year, your rate will remain at 1 % because of the cap. For lifetime caps – if you have a lifetime cap of 5 percent, the rate will not go up to more than 5 percent.
- Interest Rates Can Go Down
One of the benefits of getting an adjustable rate mortgage is that it could significantly lower your monthly payment. This is because the interest rates are based on market conditions. When the market rates go down, that means you get to save more on your mortgage. However, there is a risk involved too. It’s also possible that the interest rates could go up.
If you do not intend to stay in the house for 30 years, getting an adjustable rate mortgage would be ideal for you. You get to enjoy fixed interest rates for up to 10 years and then you can decide to sell your home.
- More Savings
One of the biggest advantages, why you need to apply for an adjustable rate mortgage, is the savings you get for the lower interest rates. When the market conditions do go up and the interest rates for the remainder of the loan is higher, there is always an option to sell your home and get a better mortgage.
- To Build Equity Faster
Compared to fixed-rate mortgages, an adjustable rate mortgage gives you a must lower rates for up to 10 years and therefore helping you build equity faster. You could also use the savings for your emergency funds or other investments. If you have the 7/1 adjustable rate mortgage, your interest rates will be the same for the first 7 years, giving you more freedom and flexibility to make use of your extra savings.
How to Choose the Best Adjustable Rate Mortgage
There are a few things to consider when deciding which type of ARM you need to apply for. How long do you intend to stay in your new home? Will you be able to afford the monthly payment for several years with your income? Are you expecting a life-changing event in the next few years?
If you do not plan to stay in your home for more than 10 years, consider applying for either 5/1 or 7/1. If you need help deciding which mortgage to apply for, you can always consult a professional for assistance.
Is it Right For You?
An adjustable rate mortgage could be a lot more beneficial for you especially when you can take advantage of the fixed-rate period. If you can make extra payments for the principal balance during the low rates time period, this means that you can pay down more mortgage payments. This could significantly save you more interest in the long run and could still keep your payments low should the interest rates do go up.
An adjustable rate mortgage is also highly advantageous for homeowners who want to buy a starter home but plans to move into a better and bigger home in the future. With the ARM, you can take advantage of the lower interest rates today.
Contact Supreme Lending
Do you need help deciding which adjustable rate mortgage to apply for? You can always reach out to us. Our professional staff can walk you through the entire process and give you assistance as needed.
Supreme Lending has been helping out homebuyers since 1999. Our ultimate goal is to enhance the mortgage process by providing top-notch services to all potential buyers.
We will stay in touch throughout the process and ensure to close your home quickly. We have a 3-step process for buying a home: Get pre-qualified, find your house and then we work with you to choose the best loan program. Contact us today to get started.