Here’s what you need to know about adjustable-rate mortgages.
Whether you’re looking to buy or sell, you’ve probably heard a few real estate terms you didn’t understand. The industry is full of confusing jargon, so today we want to go over some terms and shed more light on the world of real estate.
The main term we want to talk about is an ARM. No, it’s not your limb; it’s an acronym that stands for adjustable-rate mortgage. This is a loan where the interest rate varies throughout the life of the loan. This is opposed to a fixed loan, where if you lock in a 3% interest rate, it will stay that way unless you refinance. ARMs typically change their interest rates based on an economic factor, but they usually have a cap.
For example, you may have heard of a 5/1 ARM. or a 7/2 ARM. In these examples, the first number refers to how long the initial interest rate is fixed for, and the second number is how often the number will adjust. So in a five-one, the first five years have a fixed interest rate. After that, the number will adjust on an annual basis.
If you’re a buyer, ARMs can be a good idea if you know you’re going to be in the home for a limited amount of time. If you only plan to stay in a home for five years, a five-one ARM. makes a lot of sense because they tend to have lower interest rates. They are also a good idea when interest rates are higher because your rate could go down when it’s time to adjust. Right now, that isn’t as relevant since our interest rates are historically low, but in the future, it is something to keep in mind.
When you get an ARM, make sure you can pay not only the initial rate but an increased rate as well. Even if the market seems like interest rates will lower after the initial fixed period, you don’t want to bet your house on that being the case. During the last recession, we saw a lot of homeowners struggle with increasing rates when they couldn’t sell their homes. We always recommend you talk with a lender or financial advisor before getting an ARM.
If you have questions about today’s topic or anything else, please reach out to us via phone or email. We are always willing to help.