Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages Are Good For:

ARMs are generally suitable for borrowers who plan to sell or refinance before the rate adjusts, expect a future income increase, or seek lower initial payments.

Why take out an Adjustable Rate Mortgage?

Adjustable Rate Mortgages can be the right move for borrowers hoping to enjoy the lowest possible interest rate for a period of time. Many lenders are willing to provide lower interest rates for the initial period of your loan reducing your mortgage payment.

Although the lower mortgage payments are temporary, your budget will enjoy the initial lower monthly payments. Lower mortgage payments allow you to grow into your new home budget.  You may even be able to pay more toward principal loan balance each month paying off your mortgage earlier.

An Adjustable Rate Mortgage may be the right option for those planning to move to a new area fairly shortly after buying your home.  For example, if you intend to sell the home before the interest rate begins to adjust, any adjustments won’t be a problem for your budget – assuming the home sale goes through as planned and the mortgage is no longer yours to pay.

If you’re a buyer seeking your first home, you can also enjoy the benefits of an ARM because you’re planning to upgrade to a larger home when you can. If that plan allows you to sell the original home before the interest rate begins to fluctuate, the risks of an ARM are relatively minimal.

The flexibility you can build into your budget with the initial lower monthly payments offered by an ARM gives you the chance to build your savings and work toward other financial goals. Although there’s the looming chance of an interest rate hike after the initial period, you can build savings along the way to safeguard your finances against this possibility.

If you’re moving to a place you don’t anticipate being in for more than 5 – 7 years and are looking for the lowest interest rate on a mortgage, an ARM may be the best mortgage option for you. 

Adjustable Rate Mortgages are a good choice if you:

• Think interest rates will move lower in the future.
• Do not plan to stay in your home for many years.
• Need the flexibility of lower mortgage payments in your initial budget.
• Expect an increase of income in the future.

How Does an Adjustable Rate Mortgage Work?

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that adjusts periodically based on a financial index, such as the Secured Overnight Financing Rate (SOFR) or the Constant Maturity Treasury (CMT) index, plus a margin set by the lender. The initial interest rate is typically lower than that of a fixed-rate mortgage, offering lower monthly payments during the fixed-rate period. This introductory rate remains unchanged for a set period—commonly 3, 5, 7, or 10 years—after which the rate adjusts at regular intervals, such as annually or semiannually.

What are Adjustable Rate Mortgage Requirements?

•  Borrowers typically need to meet several key requirements. Most conventional fixed-rate mortgages require a minimum credit score depending on whether they are conventional or FHA Loans
• A down payment of at least 3% is generally required for conventional loans, though a down payment of 20% or more can help borrowers avoid private mortgage insurance (PMI). 
• Lenders also assess the borrower’s debt-to-income (DTI) ratio, with many conventional loans requiring a DTI ratio no higher than 43%, though some exceptions may apply.
• ARMs are subject to interest rate caps that limit how much the rate can increase per adjustment and over the loan’s lifetime, and they often use benchmarks like the Secured Overnight Financing Rate (SOFR) to determine rate adjustments.

It is best to get a professional Loan Advisor review for these loans since they have a lot of variants. Contact Us to help you to navigate the Fixed Rate Mortgage option