As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
As of April 20, 2020, Quicken Loans® isn’t offering conventional adjustable rate mortgages (ARMs).
Fannie Mae is lowering down payment requirements for adjustable rate mortgages (ARMs) to match up with their fixed-rate offerings.
ARMs offer an enticing interest rate advantage, particularly if you’re only looking to stay in your home for a short period of time. In the past, one thing that’s kept people from choosing an adjustable rate was the need for a higher down payment. But that’s not necessarily the case anymore.
If you’re getting a one-unit primary property, you can take advantage of an ARM with as little as 5% down. Not only is it a big deal from a down payment standpoint, but it also means you can convert more of your equity into cash in a refinance.
We’ll go over exactly what the changes are below. After that, we’ll take you through the advantages of an ARM so you can see if it’s right for you.
Down Payment and Equity Changes
The down payment and equity requirements for ARMs have been updated to match Fannie Mae’s fixed-rate mortgage options. This means clients can get into an adjustable rate with a lower down payment and that they need less equity in order to refinance.
If you’re getting a one-unit property, you only need to put 5% down, or if you’re looking to change your rate or term, you’ll need 5% equity. The requirement is 15% for a two-unit property. For a property with three or four units, you need a 25% down payment or equity stake.
If you’re taking cash out with a one-unit property, you need to leave 20% equity in the home. For a property of two or four units, you need to maintain 25% equity.
If you have a second home you’d like to purchase or refinance, it’s possible to do a purchase with as little as 10% down or do a rate/term refinance with an equal amount of equity.
If you decide to take cash out down the line, you just have to leave 25% equity in the home.
Finally, if you’re looking at doing an ARM in your investment property portfolio, you can get a one-unit property with as little as 15% down. If you’re looking at a property with two to four units, you need a down payment of at least 25%.
On an investment property, you do need 25% equity to do a rate/term refinance. If you’re taking cash out of a one-unit investment property, you must leave this amount of equity in the home. For properties of two to four units, you need to leave 30% equity to take cash out.
How Does an ARM Work?
Before we go any further on the potential benefits of an adjustable rate, how does it work? That’s a very good question that deserves an answer.
An ARM is actually fixed for the first part of the term. You’ll see them commonly advertised as 5-year, 7-year and 10-year options. These are all 30-year mortgage terms. The number you see up front is how long the mortgage rate stays fixed at the beginning of the term.
If you’re not refinancing or selling by the time that initial period is up, your rate will adjust up or down with current market rates. Your new rate will adjust, often every 6 months or on a yearly basis depending on your lender, until you refinance, sell the house or pay off the loan.
Your new rate is determined by adding a market index number that’s determined by the type of loan you have to a margin. The total is your new mortgage rate.
If rates happen to be rising, the good news is that your rate can’t go up indefinitely. There are caps on upward adjustments at the time of the initial adjustment, each adjustment after that and over the life of the loan. Your interest rate won’t skyrocket 20% in a year.
Why an ARM?
Now that you know how they work, why would you go with one in the first place? That’s another great question. Over the period of time when the loan is fixed, adjustable rate mortgages have lower rates than their fixed-rate counterparts.
One big reason for this is that investors don’t have to price higher to account for increases in inflation if they know the rate can change in five or 10 years. A 30-year fixed-rate mortgage is a great option for a lot of people. However, what they often don’t realize is that you pay extra for 30 years of rate security.
Most people don’t actually need 30 years of rate assurance. According to the most recently available data from the National Association of REALTORS, the average homeowner only stays in their home about 10 years. You might be ready to move before your rate ever adjusts. If you decide to stay there, you could always take a fixed rate if you don’t want to ride the market wave.
Another point to consider is that the Federal Reserve has raised short-term interest rates a few times over the last couple of years after having been in a long period of short-term rates at or near 0%. When the market agrees with the Fed about where the economy is going, mortgage rates tend to go up along with these increases.
In a rising interest rate environment, the difference between fixed and adjustable rates tends to become more pronounced, making ARMs more attractive.
If you think an ARM might be right for you, you can get a preapproval to purchase or a complete refinance approval online through Rocket Mortgage® by Quicken Loans®. If you would prefer to get started over the phone, one of our Home Loan Experts would be happy to take your call at (800) 785-4788.
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