A few years ago in 2021, Adjustable Rate Mortgages (or ARMs) accounted for only about 2% of all new loan types amongst homeowners. However, as interest rates and home prices have increased and changed over the last few years, ARMs are gaining in popularity. Some potential homebuyers see an ARM as a potentially more affordable way to buy a home. The reason being that ARMs typically offer a lower introductory rate than other Fixed Rate mortgage options. Now, depending on the source, ARMs make up as many as 10% of new loan applications which is a huge climb from 2%. Lets consider more details about the gaining popularity of this loan type:
What is an Adjustable Rate Mortgage (ARM)?
As is in the name, an Adjustable Rate Mortgage is a loan written where the interest rate can and will change during the life of the loan. Unlike a fixed-rate mortgage like an FHA or Conventional where the rate is locked in for a fixed period of time and will not change unless you refinance, an ARM can go through multiple rate changes over the life of the loan. There are variances and not every ARM loan is the same, so be aware of things like rate cap structures. For example, most ARMs feature an initial period which is a time when payments will not change and this can last anywhere from a few months to many years. For example, a five-year ARM has the rate fixed for the first five years. After that, the interest rate will change based on multiple market factors. Rate caps dictate variances like how much the loan will adjust the first time, how often the loan rate will change and how much this will all change over the life of the loan. There are three-year, five-year, and ten-year ARM options.
When is an ARM a good idea?
It is highly recommended to investigate all mortgage types offered to you before making your decision to go with an ARM. Some people dislike ARMs because of the unknown of the adjustments. For example, a payment may increase more than anticipated within the initial adjustment which can be a hard pill to swallow after a few years of reasonable payments. However, for short-term loans and those who think their home mortgage will only be in existence for a handful of years, it can be a decent option and save money now. For some buyers, in this current higher fixed rates marketplace in Denver, ARMs can be a good way to initially get into a home and then they opt to refinance near the end of the ARM term into a 30-year fixed loan at a lower rate than the ARM was.
It can also be a good idea for those who have wide ranging incomes and may be bringing in large sums of money in a short time, again able to pay their mortgage off sooner. And as with any mortgage product, you can refinance into a more permanent loan program at the end of the ARM period.
Who Should Avoid ARMs?
ARMs can serve a borrower well in this higher interest rates marketplace. Could rates go down with an ARM? Sure, and time would tell. But in the chance that they don’t it could be a gamble for those on a tight income or fixed budget. While those lower rates and payments feel good at first, an adjustment could make things uncomfortable. In Denver, where we still have a hot housing market with changing prices and interest rates a mortgage that adjusts in an environment where interest rates are increasing can also be a gamble. For those who are pursuing an ARM because of the lower introductory rates and trying to buy a home for the first time, I recommend looking at first-time buyer programs and to consult sources like a mortgage broker.
Do you have questions about an Adjustable Rate Mortgage in Denver? Are you in the market to buy or sell your home? Call and text me at (720) 323-4176 or email me at [email protected]
