How An Adjustable Rate Mortgage Works
An adjustable rate mortgage is a mortgage with an interest rate that adjusts depending on the market. ARMs have an initial fixed-rate period (at Quicken Loans the fixed-rate period is 5, 7 or 10 years) where the rate stays the same. When that fixed-rate period is up, the rate can adjust either up or down. ARMs are amortized over 30 years, so your payment is based on paying the loan back in 30 years (meaning it’s a low payment). These ARMs are commonly referred to as hybrid ARMs because they’re a combination of a fixed-rate loan and an adjustable rate loan.
If you choose the 5-year ARM, you’ll have the same rate for the first five years of the loan. After that, your rate will move up or down, depending on financial markets and an index called the Secured Overnight Financing Rate (SOFR). It’s common for people with ARM mortgages to enjoy a lower payment during the initial fixed-rate period and then refinance when the ARM adjusts upward. Many people refinance into another ARM to keep their payment very low as they pay down their mortgage.
When An Adjustable Rate Mortgage Makes The Most Financial Sense
ARM mortgages don’t make sense for everyone. Sometimes, a fixed-rate mortgage is a better choice to reach your financial goals. However, there are some situations when an ARM makes the most sense:
- If you don’t plan on staying in your mortgage for more than 10 years
- If you live in an area with rising home values
- If your loan is on the larger side (hint: the higher the loan amount, the more interest you’ll save with an ARM)
- If you have a job that moves you around the country frequently
- If you’re a first-time home buyer and know you will move in a few years
If you won’t be in your home long, an ARM is a great choice. I wish my real estate agent told me about ARMs when I bought my first home.
Should You Choose An ARM?
Does an ARM make sense for your financial situation? Perhaps. Perhaps not. Talk to a mortgage professional and make sure you’re getting the mortgage that best fits your goals. And next time you hear someone say that ARMs are bad, tell them that millions of Americans have saved a lot of money with ARMs over the past several decades. And you might be interested to know that in some countries, ARMs are your only choice. Canada, England and much of Europe fall into that group. For them, an ARM is a mortgage. Luckily, you have a choice between an ARM and fixed-rate loan. Choice is good.
To learn more about ARMs, watch our video. Do you have an ARM, or do you have a question about them? Ask below and we’ll answer!
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