In the current housing market, with mortgage rates on the rise, many homebuyers are considering adjustable-rate mortgages (ARMs) as a way to afford a home. ARMs offer lower introductory interest rates than fixed-rate mortgages, which can make monthly payments more affordable in the early years of the loan. However, after the introductory period, the interest rate can adjust up or down based on a market index, which means that borrowers could see their monthly payments increase. Real Estate Agents, especially buyer’s agents, should be familiar with this mortgage product and they help clients navigate the housing market.
Pros of ARMs
- Lower introductory interest rates: ARMs typically have lower introductory interest rates than fixed-rate mortgages. This can make monthly payments more affordable in the early years of the loan, which can be helpful for homebuyers who are on a tight budget.
- Ability to refinance: If interest rates fall after the introductory period, borrowers can refinance their ARM to a lower interest rate. This can save them money over the long term.
- Flexibility: ARMs offer borrowers more flexibility than fixed-rate mortgages. For example, some ARMs allow borrowers to choose how often their interest rate adjusts, and some ARMs have caps on how high the interest rate can adjust.
Cons of ARMs
- Risk of higher monthly payments: After the introductory period, the interest rate on an ARM can adjust up or down based on a market index. This means that borrowers could see their monthly payments increase, which could make it difficult to afford their mortgage.
- Complexity: ARMs can be more complex than fixed-rate mortgages. It is important to understand all of the terms and conditions of an ARM before you take one out.
- Not suitable for all borrowers: ARMs are not suitable for all borrowers. Borrowers who are risk-averse or who have unstable incomes should avoid ARMs.
When are ARMs a good idea?
ARMs can be a good idea for homebuyers who:
- Plan to sell their home within a few years: If you plan to sell your home within a few years, you may be able to take advantage of the lower introductory interest rates on an ARM.
- Have a stable income: If you have a stable income, you may be able to afford the risk of higher monthly payments if interest rates rise.
- Are comfortable with risk: ARMs are a riskier type of mortgage than fixed-rate mortgages. If you are not comfortable with risk, you should avoid ARMs.
When are ARMs not a good idea?
ARMs are not a good idea for homebuyers who:
- Plan to stay in their home for many years: If you plan to stay in your home for many years, you may be better off with a fixed-rate mortgage.
- Have an unstable income: If you have an unstable income, you may not be able to afford the risk of higher monthly payments if interest rates rise.
- Are not comfortable with risk: If you are not comfortable with risk, you should avoid ARMs.
Conclusion
ARMs can be a good option for some homebuyers, especially in a rising interest rate environment. However, it is important to understand the risks and benefits of ARMs before you take one out. Be sure to speak with a qualified mortgage professional to discuss whether an ARM is right for you.
Sources:
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/owning-a-home/explore/adjustable-rate-mortgages/
- Bankrate: https://www.bankrate.com/mortgages/arm-loan-rates/
- NerdWallet: https://www.nerdwallet.com/article/mortgages/adjustable-rate-mortgage-arm
Disclaimer: The information provided in this blog post is based on reputable sources and is intended for informational purposes only. It should not be considered as financial or professional advice. Real estate agents and homebuyers should consult with relevant professionals for personalized guidance.
