Adjustable Rate Mortgage (ARM)
When you are ready to purchase a home, one of the significant decisions you must make is how to finance the transaction. In most cases, residential buyers cannot afford the full purchase price of a home with cash, so the only solution is to borrow money from a lender. With numerous loan products on the market, deciding how to structure a mortgage loan will affect your budget for the entire homeownership period.
Adjustable-rate mortgages, also called variable-rate mortgages, are a type of loan structure that significantly affects monthly payments. This product is more flexible than its fixed-rate counterpart. An adjustable-rate mortgage can allow for lower initial interest rates for qualified borrowers.
TrueWay Mortgage is an experienced lending partner that can help you navigate the loan selection process. We offer adjustable-rate mortgage (ARM) loans that can be tailored to the diverse needs of different homebuyers. Let’s take a deeper dive into these loans to help you decide on the structure of your next home loan.
What is an Adjustable Rate Mortgage?
The primary feature of an adjustable-rate loan is that its interest rate can shift from year to year. The interest rate of your loan determines your monthly payment and total loan amount. The higher the interest rate, the more you must pay to borrow and own the home. The interest rate will change based on the individual lender and housing market conditions.
On the other hand, a fixed-rate mortgage locks in the same interest rate for the life of the loan. Your principal and insurance payments will remain unchanged for the entire loan term.
If you need assistance understanding ARM loans and how they work, TrueWay Mortgage can walk you through the selection process. It is essential to make an informed decision when choosing a home loan.
How Does an Adjustable Rate Mortgage Work?
Prospective borrowers must understand the mechanics of ARMs to make informed decisions for their real estate transactions. The typical adjustable-rate loan will have an initial fixed-rate period. This initial interest rate could last for several years, depending on the terms of your contract. Once this initial period ends, the interest rate will experience its first adjustment based on lender criteria and the housing market.
Another essential mechanic to understand is the adjustment intervals. Typical intervals may last one, three, or five years. These represent the amount of time before the interest rate shifts. For example, a 5-1 ARM would mean there is a five-year period that locks in the initial interest rate. Afterward, the interest rate changes every year. ARM interest rates are calculated based on housing market indices.
There are a few other things to know. Whether you have to pay private mortgage insurance may depend on your down payment. Most companies don’t require private mortgage insurance with a down payment of 20%. A secured overnight financing rate means the interest rate changes with the SOFR. Most applicants pay an origination fee, which is the application processing cost.
The team at TrueWay Mortgage believes in transparency, so we will ensure you understand ARM interest rates, how they may change over time, and how they will affect your monthly payment.
Key Features of Adjustable Rate Mortgages
ARMs are a solid option for specific borrowers when buying homes or other types of properties. However, you must understand the key features of these products to know how they work. Plus, you should build a budget around the variability they involve. TrueWay Mortgage is dedicated to guiding buyers through elements like fixed interest periods, rate caps, and market index linkage.
Initial Fixed-Rate Period
ARM rates during the initial period are typically competitive. You can lock in lower interest rates for five, seven, or even ten years, depending on the lender and the size of the loan. Once you move past this index rate period, your monthly payment could change if the interest rate shifts.
The initial period offers borrowers stability during the early years of the loan, making it easier to prepare for the fluctuating payments that may follow. However, buyers must have enough cash to pay larger payments if interest increases. A few percentage points can have a significant impact on your total interest.
Rate Adjustment Periods
When the initial rate ends, the loan will be subject to interest rate changes based on intervals. Your loan contract could have intervals of one, three, or five years, which means the rate will shift again after those intervals are completed. This will determine your monthly payment until the next interval hits. If the interest rate rises between intervals, your monthly payment will increase for the next one, three, or five years.
This can make it easy to afford costs in the beginning, such as the origination fee, when the total interest might be lower. However, it’s important to note that the payment may increase after rate adjustment periods. Make sure you can afford mortgage payments alongside other expenses, such as property taxes. Always know your payment options in case you experience hardship.
Rate Caps
While this may sound scary, especially if the market continues in a concerning direction, terms are in place to protect borrowers. Primarily, rate caps will protect buyers from massive increases in the loan amount between intervals.
However, there are also caps on the maximum amount the interest rate can decrease over the life of the loan. Either way, your payment amounts may shift every few years, but they shouldn’t move too drastically due to these rate caps.
TrueWay Mortgage will provide clarity by outlining these caps when you apply for variable-rate mortgages. We don’t offer a teaser rate and let you go into a mortgage blindly. Instead, our agents will explain everything you need to know.
Benefits of Adjustable Rate Mortgages
Borrowers who obtain ARMs can access numerous advantages. The main benefits are lower interest rates, potential savings on interest, and flexibility for short-term homeowners. Let’s outline these benefits in greater detail so you can assess what TrueWay Mortgage can provide to qualified borrowers.
Flexibility for Short-Term Homeowners
An ARM loan program is ideal for short-term homeowners. You may have a job that requires you to move every few years, or you have a growing family and plan to upsize several years down the road.
If you plan to sell or refinance before the fixed-rate period ends, an ARM will save you thousands of dollars. Obtaining an ARM and living in the same property for several decades will put you at the mercy of the market when the interest rate shifts.
Potential for Interest Rate Savings
Many borrowers may be hesitant to consider ARM loans because they fear rising interest rates. After all, if the interest rate climbs too high after the fixed rate ends, their monthly payment will increase dramatically.
However, if the market rates decrease or the borrower refinances before the adjustment period, they could save a lot of money in those first few years. The key to saving money on interest payments is preparing for the adjustment period and paying attention to the market.
Lower Initial Payments
The initial interest rate is one of the biggest draws for these mortgage loan products. In most cases, the interest rate for this period is even lower than comparable fixed-rate loans. This makes them an attractive option for many borrowers, especially those who may not plan to live in their homes for a long time. Although the interest rates could eventually increase, they could also stay relatively low if the market is doing well.
Low interest payments help avoid negative amortization. Negative amortization is when the payments are too low to cover the interest. Then, the rest of the interest gets rolled into the loan, and is paid off with the life of the loan. Some people do this on a larger loan for a short period if they are experiencing financial hardship, but it can be risky.
Adjustable Rate Mortgage Eligibility
Not all borrowers are qualified for adjustable-rate loans. While requirements will vary between financial institutions, you must meet specific eligibility criteria like minimum credit scores, maximum debt-to-income ratios, and property standards. TrueWay Mortgage can play a crucial role in helping you meet these requirements when applying for an ARM.
Credit Score Requirements
Your credit score is one of the primary metrics lenders use to assess your risk as a borrower. Whether you are borrowing from a bank or credit union, most lenders prefer a minimum credit score of 620 for adjustable-rate loans. Exceptions could be made for lower scores, though you must be strong financially in other areas to overcome a score below 620.
The team at TrueWay Mortgage can guide you through this process to understand how your credit score will affect eligibility and interest rates throughout the remaining term of the loan. Our agents can also explain credit score requirements for hybrid ARMs.
Property Types Eligible for ARMs
Since ARMs are closer to loan structures than loan programs, they are very flexible. You can get an adjustable rate for a conventional, FHA, USDA, VA, or even jumbo loan. Therefore, you can use ARM loans to purchase most types of properties. This can include a primary residence, a multi-family property, a second home, or even an investment property.
Income and Debt-to-Income Ratio
All lenders want to know that borrowers have enough income to cover the upfront costs of the home and their monthly payments. You must provide income verification and even employment verification, which may involve documents like bank statements, W-2s, tax returns, paychecks, or other income forms.
One number lenders often look at is your debt-to-income ratio. You will get a percentage if you divide your monthly debt obligations by gross monthly income and multiply by 100. A debt-to-income ratio of 50% is the absolute maximum lenders will accept.
TrueWay Mortgage will use our expertise to help borrowers qualify for ARMs based on their income and DTI ratios. We’ll explain everything through the course loan, from the first adjustment to the remaining loan term.
Who Should Consider an Adjustable Rate Mortgage?
Every borrower’s financial situation is unique, as are their goals for the home. If you expect your income to grow substantially over time, an ARM makes sense due to a lower monthly payment in the initial years.
If you plan to move after a few years, an ARM will let you access a prime rate before the rate adjustments kick in, helping you save money. Lastly, an ARM is an ideal loan structure if you want to delay rate increases for several years in favor of lower initial payments.
Comparing Adjustable-Rate Mortgages to Fixed-Rate Mortgages
Deciding between an adjustable-rate and fixed-rate mortgage is an important decision. Each loan structure has unique advantages that suit diverse borrower needs. An ARM is better suited for those who move often or will have increased income in the future. Fixed loans are ideal for buyers who plan to live in their homes for a long time.
Stability vs. Flexibility
One key consideration that differentiates these two loan structures is stability. A fixed-rate loan is better if you want stability in your monthly payment and no rate adjustments. If you prefer the flexibility and potential savings of an ARM, then the initial period and index rate changes could benefit you financially.
Costs Considerations
It is always important to weigh the costs of different loan options. Many factors affect the total cost of a loan, such as mortgage insurance, closing costs, prorated property taxes, appraisal fees, homeowners insurance, down payments, and market conditions.
Using an ARM to purchase a home will subject you to specific cost considerations. You must be aware of the corresponding financial index and how the market is behaving since it will affect your interest rates. You should also know the capped rate when the intervals approach. If you plan to refinance, this will also involve closing costs and changing monthly payments.
TrueWay Mortgage will communicate with you openly and honestly to ensure your loan is affordable with these financial considerations.
Customizing an Adjustable Rate Mortgage with TrueWay Mortgage
As an experienced lending partner, we pride ourselves on providing customization for different loan products. TrueWay Mortgage can tailor an ARM to suit your individual financial goals. Whether you need flexible terms or a unique repayment structure, we aim to create a loan product that makes property ownership affordable and accessible.
Adjustable Rate Mortgages for Investment Properties
Investment properties behave differently than primary residences. An ARM can appeal to investors who want low initial monthly premiums to maximize their short-term cash flow. If you are interested in investing, our team will help you navigate the advantages of an ARM to grow your portfolio and maximize income.
Why Choose TrueWay Mortgage for Adjustable Rate Mortgages?
Experience is key when choosing a lending partner. At TrueWay Mortgage, we are committed to a customer-centric approach. Our team focuses on transparency, expertise in local markets, and a commitment to finding the best deal for each client.
Contact Sam and Anisha Mauldin
TrueWay Mortgage
Start Your Adjustable Rate Mortgage Journey Today
TrueWay Mortgage is ready to guide you through the entire home loan process. Whether you need help understanding the eligibility criteria or creating a budget based on adjustable interest rates, our team will help you find a solution.
Look at our quick quote tool to get a loan estimate on potential interest rates for an ARM. If you are ready for a consultation, call us today at 404-962-0032.