4 reasons to consider an ARM.
There’s been a lot of talk in the news lately about mortgage rates and the affordability of housing in the Portland metro area. Some homebuyers have found that an adjustable rate mortgage (ARM) is a good option for them. Since no financial solution is right for everyone, we want to introduce you to ARMs and invite you to follow up with a conversation about what they are and when they make sense.
After the fixed rate period ends, your payments start to include the “adjustable” rate, which is based on a fluctuating industry benchmark plus a pre-determined margin above that rate. In most cases, the rate adjusts every 6 months for the remaining term of your mortgage.
The ARM is described as “years of initial term”/”frequency of rate adjustment” — for example, 5/6, 7/6, or 10/6. Most adjustable rates have a cap on how much the rate can increase annually or semiannually and/or over the lifetime of the loan.
*Please note these are just a few examples; ask your loan officer if other options are available.
How an ARM is structured
A hybrid ARM is a combination of a fixed-rate and variable-rate loan. This type of mortgage is structured with a lower fixed interest rate during the initial term (usually 5, 7, or 10 years) and then it shifts to the adjustable rate.*After the fixed rate period ends, your payments start to include the “adjustable” rate, which is based on a fluctuating industry benchmark plus a pre-determined margin above that rate. In most cases, the rate adjusts every 6 months for the remaining term of your mortgage.
The ARM is described as “years of initial term”/”frequency of rate adjustment” — for example, 5/6, 7/6, or 10/6. Most adjustable rates have a cap on how much the rate can increase annually or semiannually and/or over the lifetime of the loan.
When an ARM makes sense for Portlanders
A key benefit of an adjustable-rate mortgage is lower payments in the early years. The potential downside to an ARM is that you may be caught off guard several years later when the rates go up at the end of the fixed-rate period. Here are some examples of situations that can be well-suited to an ARM:- If you don’t plan to live in your home beyond the fixed rate term, this can be a smart way to lower your payments. Ideally, you’ll sell your home before the adjustable rate kicks in or shortly afterwards.
- If you’re a first-time homebuyer, you may be attracted to the lower initial payments, especially if this is your “starter” house.
- If you anticipate an income increase in a few years, it may be easier to qualify for the size mortgage you want now if you choose an ARM with lower up-front payments. Sources of future income may include having a stay-at-home parent who plans to return to work later, those starting out in careers with accelerated income growth, or people who anticipate receiving a large sum of money in the near future.
- If you plan to sell your existing home in approximately 5–7 years, refinancing your existing fixed-rate loan with an adjustable rate mortgage could reduce your payments during the time you’re planning to remain in your home. Of course, this depends on your current interest rate, amount of equity, and other factors.
Start with the right team
Choosing a mortgage can be overwhelming. Choosing the right mortgage provider shouldn’t be. Reach out to one of our loan officers — they can help you make the right decision for your homebuying needs.*Please note these are just a few examples; ask your loan officer if other options are available.