Homeownership Is Still Within Reach with Adjustable-Rate Mortgages!
2022 is proving to be challenging for homebuyers, with skyrocketing prices and interest rates. To afford a home in today’s market, you may need to think differently about financing. Consider an adjustable-rate mortgage (ARM) loan, which offers much lower initial interest rates, translating to lower monthly payments and more buying power.
An ARM loan features a low initial fixed-interest rate, followed by periodic rate adjustments (variable-interest rate). Initial ARM rates are typically much lower than fixed-mortgage rates, sometimes by a full percentage point or more.
You might benefit from an ARM if you:
- Need lower monthly payments
- Want to consider a bigger or more expensive home
- Don’t plan to stay in your home forever
- Are buying one house and selling another at the same time
- Anticipate a future income increase
- Are buying your first home
- Plan on paying more than the minimum monthly payments on the loan
How does an ARM work?
- The low introductory rate is constant for a fixed period of time.
- When the fixed-rate period ends, the interest rate adjusts up or down based on the current market rate.
- Periodic and lifetime rate caps limit how much rates and payments can increase when rates adjust upward and in total.
- ARMs numbers tell you how long the initial fixed-rate period lasts (first number) and how often the interest rate can change after the initial period (second number).
- For example, a 5/1 ARM has a fixed rate for 5 years, then the rate changes every year for the next 25 years. A 5/5 ARM has a fixed rate for 5 years, then the rate changes every 5 years for the next 25 years.
What is the difference between a fixed-rate mortgage and an ARM?
- The interest rate never changes on a fixed-rate mortgage
- An ARM’s interest rate can change once the initial fixed-rate period ends.
Is an ARM Right for You?
If you have a high debt-to-income ratio (monthly household income versus monthly expenses), you may find it easier to qualify for an ARM than a fixed-rate mortgage due to the lower interest rate.
Some of the riskiest features of previous ARMs—prepayment penalties, negative amortization, interest-only—that kept borrowers locked into loans with expensive terms are no longer allowed. ARM mortgages are also protected by caps:
- Initial and periodic rate-increase limits: Cap the amount your loan can increase or decrease during the first and each periodic adjustment
- Lifetime limits: Cap the maximum rate the loan can ever have
Refinancing an ARM when interest rates are low can give you a stable monthly payment. Refinancing can also help you consolidate debt or pay off a mortgage faster by shortening the term.
An ARM loan might NOT be right for you if:
- You’re uncomfortable with possible increases in rates and monthly payments
- You plan to stay in your home forever
- You anticipate that your income could decrease (for example, when you retire)
Find out how an adjustable-rate mortgage can benefit you and lock in a great rate today. Contact a Los Angeles Police Federal Credit Union loan specialist at (877) 695-2732, ext. 7777.