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With interest rates on the rise, the market is rapidly changing if you’re looking to purchase or refinance your house. The conventional wisdom of taking a 30-year fixed rate mortgage may not make sense for everyone anymore. For many clients, it makes a whole lot more sense to take a look at an adjustable rate mortgage (ARM).
The key advantage of an adjustable rate is that you can get a lower rate than you would on a comparable fixed loan. In the past, you had to make a substantially higher down payment on an ARM. Now Quicken Loans is lowering down payments on conventional mortgages with adjustable rates.
We’ll go over the details and get into some basics on ARMs and why they make sense as interest rates rise.
Down Payment Adjustments on ARMs
Quicken Loans is rolling out lower down payments on ARM loans for single-family primary residences. You’ll now be able to get a one-unit primary property with a down payment of as little as 5% of the purchase price. Similarly, if you’re refinancing, you can also do a rate-term refinance with as little as 5% equity.
If you are looking to take cash out, have a second home or are purchasing an investment property, you’ll need to bring a little more as a down payment or have a little more equity – but we still offer great options that can help you achieve your goals.
Now that you know the changes in down payments and equity requirements on loans with adjustable rates, let’s take a few seconds to go over why you might pick an ARM.
Understanding ARMs and Why They Make Sense
Lower down payments are great, but if you’re wondering why an ARM might make sense in this interest rate environment, let’s go more in depth.
One of the biggest misconceptions about ARMs is that they adjust constantly. In reality, it’s a 30-year loan with an interest rate that remains fixed for a period of time at a lower rate than you would typically get with a fixed-rate loan.
That fixed period of time lasts for 5, 7 or 10 years, depending on what you choose. The National Association of REALTORS® 2016 Profile of Home Buyers and Sellers shows that average tenure in a home is 10 years. If you went with a 10-year ARM, there’s a good chance you’d be getting ready to buy your next home before the rate ever adjusted.
If you do happen to stick around for the rate to adjust, your rate adjusts once per year after the fixed period. You could also refinance into a fixed rate.
If you get your ARM through a conventional loan, your rate is based on the one-year London Interbank Offered Rate (LIBOR). On the date your rate is supposed to adjust, the current LIBOR rate is added to a margin to come up with your new rate, which may go up or down.
It’s important to note that if your ARM rate does go up after that fixed period, there are limits to how much it can adjust at the initial change. Similar caps to upward changes exist for each subsequent change and over the entire life of the loan, so your rate can’t go up indefinitely.
With that said, why does an ARM make sense right now?
ARMs and Rising Rates
In a rising interest rate environment, it makes a lot of sense to go with an ARM for a couple of reasons.
The yield curve that describes the difference between adjustable and fixed rates gets wider as rates go up. In other words, there’s a bigger difference between lower adjustable rates and higher fixed-rate mortgages when rates are higher.
The second reason is that if you go with a 30-year fixed rate mortgage, you pay extra for that 30 years of rate protection. Let’s say you only plan on being in the house for seven or 10 years. Why would you pay more for 30 years’ worth of rate security when you can get a lower ARM rate that’s not going to adjust until you’re ready to move anyway?
Do you think an ARM might be right for you? You can get a preapproval to purchase or a full refinance approval online through Rocket Mortgage. If you’d rather get started over the phone, you can call one of our Home Loan Experts at (800) 785-4788.
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