When shopping for a home loan, you may encounter an adjustable-rate mortgage or ARM. Unlike a fixed-rate mortgage, where the interest rate remains the same throughout the life of the loan, ARMs offer a lower initial rate that adjusts periodically based on market conditions.
How Do ARMs Work?
ARMs typically start with a low, fixed interest rate for a set period—often 3, 5, 7, or 10 years. Once this period ends, the interest rate adjusts annually based on a benchmark index, such as the SOFR (Secured Overnight Financing Rate), plus a margin set by the lender. For example, a 5/1 ARM means the rate is fixed for five years and adjusts once a year after that. Most ARM’s are fully amortized over 30 years.
Pros of ARMs
- Lower Initial Payments: The introductory rate is usually lower than a fixed-rate mortgage, making homeownership more affordable upfront.
- Flexibility: If you plan to sell your home or refinance before the fixed period ends, you can save money on interest with an ARM.
- Potential Savings: If interest rates remain stable or decrease over time, your rate adjustments could work in your favor.
Cons of ARMs
- Rate Increases: Your rate could rise significantly after the fixed period, leading to higher monthly payments.
- Uncertainty: Changes in market conditions make it hard to predict future costs.
- Refinancing Risks: If home values drop, refinancing to a fixed rate may not be an option.
Is an ARM Right for You?
ARMs are ideal for buyers who value flexibility or expect to move or refinance before the initial fixed period ends. However, they’re riskier for those who plan to stay in their home long-term or need consistent monthly payments.
If you have questions, please contact our office to discuss your mortgage needs with one of our experienced Mortgage Loan Originators at (760) 930-0569.