Is an Adjustable-Rate Mortgage Right for You?
With mortgage rates still high, many buyers are exploring alternatives to ease their entry into homeownership. Adjustable-rate mortgages (ARMs) offer short-term flexibility and lower initial payments—but they come with trade-offs.
New Year, New Home? Exploring Adjustable-Rate Mortgages
Will 2024 be the year you buy a home? If you’re anxious about affordability, you’re not alone. Sellers are struggling to sell and mortgage rates have reached 8% for the first time since 2000. Real estate economists predict rates will drop slightly in 2024, but not enough for real relief. One option gaining traction: adjustable-rate mortgages. While not without its risks, ARMs can provide relief in a few different ways.
What Is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage (ARM) is a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for a set period. After that, the rate on the outstanding balance resets periodically, at yearly or monthly intervals.
For example, a 5/1 ARM has a fixed rate for five years and then resets every year after that. A 5/6 ARM is fixed for five years and resets every six months.
Initial Affordability and Lower Interest Rates
The initial lower interest rate of ARMs can provide you with a more affordable entry point into homeownership. In a housing market where prices have surged, locking in a lower interest rate at the outset can lower your monthly mortgage payments—making your dream of owning a home more achievable.
Short-Term Security and Flexibility
ARMs offer short-term security and flexibility if you know you won’t be in the home for more than a few years or if you anticipate changes in income, job location, or household size. Alternatively, if you experience a loss of income or are growing your family, the initial lower payments of an ARM provide breathing room.
Interest Rate Caps Add Protection
As mentioned above, ARMs are not risk-free. During the foreclosure crisis, many buyers locked in low rates that later reset and caused monthly payments to balloon beyond what they could afford.
Today, tighter regulations and increased transparency have mitigated some of that risk. Interest rate caps limit how much rates can increase during specific periods, giving you more predictability and protection against drastic rate hikes.
Qualify for a Larger Loan
With lower initial interest rates, ARMs can allow you to qualify for larger loan amounts compared to fixed-rate mortgages.
This can be especially helpful if you’re looking to purchase a larger home or secure a move-in ready property in a competitive housing market.
Get Connected Before You Commit
While ARMs offer a compelling alternative for those who value flexibility, short-term stability, and potential savings, it’s important to connect with your financial organization or a certified housing counselor.
They can help you explore down payment assistance programs, answer your questions, and determine whether an ARM aligns with your long-term goals. Making an informed decision is the first step toward confident homeownership.