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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.

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