Higher interest rates have impacted borrowers in Orem, Utah, and these days, more would-be homeowners are contemplating adjustable-rate mortgages (ARMs) instead of fixed-rate home loans.
If you’d like to buy a home, an ARM could be an affordable means to make that happen. But would this type of mortgage fit with your home loan goals? Is it wise given the potential risk of future payment fluctuations? Reading the following should help you decide.
How Adjustable-Rate Mortgages Work
Before we delve into the merits and drawbacks of ARMs, it’s important to explain the structure of these home loans.
As the name suggests, this type of mortgage features an interest rate that changes over time. However, it isn’t like borrowers pay one rate during the first month and a different one the next. With an ARM, the initial rate remains for a set period, typically a few years, then adjusts every six months or once per year thereafter.
One of the more common is the 7/1 ARM, with the first number signifying the number of years the fixed term lasts and the second indicating that adjustments occur each year after that. Other options, such as 5/6 or 10/6 ARMs are also available. Here, the rate stays unchanged for either the first five or ten years, then resets every six months.
Highlights and Challenges of Adjustable-Rate Mortgages
Before deciding if an ARM might be the right choice, there are plus and minus points to consider. Features that can be beneficial for homebuyers include:
- Lower introductory interest rate compared to a similar fixed-rate home loan
- Initial savings, as the low initial rate translates to lower monthly payments
- Caps that limit the amount the rate can rise during adjustment periods
Additionally, depending on market conditions, borrowers may see rates drop after the introductory period ends. There’s also the potential to refinance before that time arrives, keeping adjustments from being a factor. But homebuyers need to understand the other side of the coin, too. ARMs come with a few notable concerns, including:
- Monthly mortgage costs may increase when the home loan resets
- Mortgage fluctuations make financial management more difficult
- Unaffordable loan payments could lead to credit problems
- Despite initial savings, the mortgage may cost more overall
Is an Adjustable-Rate Mortgage Right for You?
If you’re comfortable with the risks – or if you plan to sell or refinance before the end of the fixed period — an ARM could be a good choice. But exploring all your lending options is in your best interests, and the mortgage professionals at Intercap Lending would be happy to help. We take pride in guiding people down the path to homeownership, and you can count on us to match you with a home loan that meets your unique needs. For more information on adjustable-rate mortgages, contact our office in Orem, Utah, today.