Learn About Adjustable-Rate Mortgages
Are you in the market for a new home but aren't sure what type of mortgage loan to choose? Have you considered an Adjustable-Rate Mortgage (ARM)? At Catalyst Mortgage, we have ARM loans available to help the right type of customer in the right type of market. ARMs have historically gotten a bad rap, but in today's market, ARMs can save customers money and usually have some protections built in. Read on to learn more about ARM loans.
What is an Adjustable-Rate Mortgage loan?
An ARM is a mortgage loan that features an interest rate that may change periodically based on several factors. These types of loans sometimes offer a lower initial interest rate than a fixed-rate mortgage which can lead to lower monthly payments, and therefore more buying power or greater refinance savings.
Who qualifies for an Adjustable-Rate Mortgage?
These loans are ideal for individuals who plan to live in their homes for a short period of time or those who have plenty of disposable income to cover potential future rate increases. Qualifying for ARM loans is very similar to qualifying for other loans - the main difference is that instead of borrowers qualifying based on their actual day 1 payment, underwriting may use a higher rate to qualify (for example, if an ARM starts with a 5% rate for the first 5 years, underwriting may qualify the borrower with a higher payment based on a 7% rate - to account for potential rate increases).
Overall though, ARMs aren't much different than fixed rate loans from a qualifying perspective, and more often than not 7- and 10- year ARMs are qualified the same as fixed rate loans.
What are the benefits of an Adjustable-Rate Mortgage?
The lower initial interest rate can lead to lower monthly payments, which is ideal for those who are looking to save money on their monthly expenses. Additionally, an ARM can be a great option for those who are not planning to stay in their home for the long-term. This means they can take advantage of the initial lower interest rate for the period in the home.
Adjustable-rate loans typically have a rate adjustment cap that limits how much the interest rate can adjust in any given year, helping to avoid any unexpected surprises.
How often can my interest rate change with an Adjustable Rate Mortgage?
Your interest rate change will depend on the specific terms of your loan. Some loans may adjust just once per year, while others may adjust as often as once per month. The most common adjustment period is typically every six months. Most ARMs are described using their adjustment schedule - for example, a "5/1 ARM" is one that is fixed for 5 years, and adjustable every 1 year thereafter. How much an ARM adjusts is usually based on market conditions, but ARMs are tied to broader financial markets. Many ARM loans today are priced at a margin on top of a publicly-searchable financial index, with the Secured Overnight Financing Rate (SOFR) being today's most commonly used index for ARM products.
At Catalyst Mortgage, we can help find the perfect ARM for you and your specific needs. Contact us today!
