An Adjustable Rate Mortgage (ARM) offers attractive benefits for buyers seeking ways to reduce the price of entry into the housing market. A typical ARM starts with a lower fixed interest rate for the first years, such as for 2-5 years. After this introductory period ends, the rate adjusts based on market conditions.
Here’s an example of a common 5/1 ARM with a 5% cap. After 5 years, the rate adjusts once per year, but not by more than 5 percentage points above your initial rate.
ARMs make sense for some home buyers who plan to repay their loan early or sell before the end of the introductory period. A low initial rate enables a buyer to qualify for a mortgage easier than a higher fixed rate.
Risk-averse buyers may prefer a fixed-rate mortgage where the interest rate remains the same for the life of the loan, regardless of what is happening in the market.
ARMs can be somewhat complicated, so be sure to discuss the fine points with a trusted mortgage lender. Let me know if you need a referral.