An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change periodically. This means monthly payments can go up or down. Uncertainty of future payments can be unnerving for some borrowers. However, there are other features of ARMs that make them a valuable tool when used under the right circumstances. ARM rates are generally lower than fixed loans. Closing costs are often less, too. Given the relatively low expenses at the front-end of the loan, ARMs can become more attractive than their fixed counterparts, particularly if someone does not plan to remain in their home for long.
On average, most American’s own their house for six years before moving. Many ARM products have a fixed interest rate for the first five years (at a lower rate than fixed loans, as mentioned earlier). Given this, many people should consider ARM loans when comparing financing options.
Consider the following example where someone lives in their home for five years:
5/5 ARM Fixed Mortgage
Loan Balance $200,000 $200,000
Loan Rate 4.000% 4.625%
APR* 4.100% 4.712%
Number of payments 360 360
Loan payment $955 $1,029
Reduced monthly payment $74 ——
As you can see, a person would have come out $6,203 ahead using an ARM under this scenario.
Does this make ARMs a best-fit for everyone? No, but they may deserve consideration when constructing your mortgage plan. To determine which product is best for your situation and goals, contact SouthPoint’s mortgage professionals today.
*APR= Annual Percentage Rate. Mortgage Loan: $100,000 borrowed for 360 months (30 years) with an APR of 6.00% would have a monthly payment of $599.55. The payment example does not include amounts for taxes and insurance premium, if applicable, and that the actual payment obligation will be greater. The terms listed are the maximum term available for qualified borrowers. Interest rates are subject to change based on the type of loan, the collateral, loan to value, borrower’s credit history, account relationship, and automatic payments. Rate is variable and can increase no more than 2 percentage points every 5 years with a lifetime maximum adjustment of 5%. Variable rate is based on 10 Year Treasury rate. 10 Year Treasury rate changes are shown in the Wall Street Journal. Adjustable Rate Mortgage (ARM) rates are subject to change during the term of the loan. Other conditions may apply.