Exploring the Advantages of Adjustable Rate Mortgages: Flexibility and Financial Benefits
Jun 06, 2023 brooklyn,Brooklyn Buyers,Brooklyn Buyers Agent,brooklyn real estate,brooklyn realty,Buying in Brooklyn,finances,mortgage loans,mortgages
First, let’s answer the question, “What are Adjustable-Rate Mortgages?”. An ARM is an alternative option to the traditional fixed-rate mortgage. Unlike fixed-rate mortgages, they provide borrowers with the flexibility of a fixed interest rate for a specific number of years, after which the rate and monthly payment can fluctuate.
ARM loans are commonly structured in 3/1, 5/1, 7/1, and 10/1, each representing the fixed interest period. For example, a 3/1 structure locks in the interest rate for three years, and then the rate is adjusted annually for the remaining life of the loan.
Despite some criticism, there are several advantages:
1. Lower Payments and Initial Interest Rate
Borrowers can access great interest rates by opting for an Adjustable Rate Mortgage, especially when general interest rates rise. ARMs generally offer lower interest rates than fixed-rate loans, resulting in lower monthly payments. This can be particularly advantageous for borrowers looking to save on their monthly expenses. If interest rates fall, the ARM rate will be dropped to remain competitive with current offers. However, it’s essential to keep in mind that rates can also go up, so borrowers should consider refinancing or selling their home before the rate lock is over to avoid potential increases.
2. Pay House Principal Down Faster
A lower interest rate means a higher percentage of payments toward the principal of the loan. This enables borrowers to pay their principal faster and build home equity. Since the monthly mortgage payment is lower than a fixed-rate mortgage, some savings can be used to pay the principal balance faster. ARM loans have no prepayment penalties, so there are no hidden fees.
3. Buy More House
Adjustable Rate Mortgages provide an opportunity for buyers to allocate more money toward the principal mortgage payment rather than initial interest charges. Even a slight difference in interest rates can significantly impact monthly payments, allowing buyers to consider purchasing a higher-priced property within their budget.
4. Potential for a Lower Payment After the Fixed Period
After the fixed rate period ends, the lender re-evaluates the loan and adjusts the rate accordingly. If interest rates have fallen, the rate and monthly payment can also drop, providing additional savings for homeowners. For example, if rates fell from 6% to 3% after a 3-year fixed-rate period, the lender would adjust the rate to reflect the current rates, resulting in further cost savings.
How to choose the right ARM?
When selecting an ARM, borrowers should consider the initial interest rate and fixed rate period. Generally, a shorter fixed-rate period offers a better overall rate. However, if there is uncertainty about long-term plans for the property, opting for a longer fixed rate period provides more time to decide whether to stay or upgrade.
CrossCountry Mortgage offers a user-friendly ARM mortgage calculator to assist borrowers in making an informed decision. This tool helps determine the affordable borrowing amount using an Adjustable Rate Mortgage, estimating principal, interest, insurance, property taxes, and monthly mortgage payments.
It is crucial to carefully weigh your options and consult with professionals when considering an ARM or any significant financial commitment. If you need some guidance, get in touch!
Check out our comprehensive guide for buying your first home in Brooklyn, NY.
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