When you take out a mortgage on a property, there are many different types of loans available. One you may not have thought of, is an adjustable rate mortgage, or ARM loan. Adjustable rate mortgages got a bit of a bad rap during the housing market crash, but as the general public has become more informed about ARM loans, more borrowers are choosing this type of mortgage when it makes sense. To fill in the blanks, here’s our conversation with Prosperity Home Mortgage Regional Mortgage Manager, Amy McDonald.
What is an adjustable rate mortgage?
It is a type of loan that has a short-term fixed period, followed by a time during which the rate can adjust up or down. The most common fixed terms for adjustable are 5, 7 and 10 years.
What are the advantages?
The rates for adjustable loans are lower than fixed. If the borrower plans to move or pay off the loan in the next 7 years, an adjustable rate mortgage would save them in interest costs during the lower rate fixed period. The rate could go down after the fixed time frame, should the current interest rate market be lower!
What are the disadvantages?
There’s a chance the rate could increase at the end of the fixed period. The adjustment periods are usually every 6 months and typically can’t increase more than 2% over whatever the start rate was. There is also a lifetime cap (usually 5% over the start rate) at which the rate would stop increasing, should it reach that limit.
What type of person would you recommend opt for an adjustable rate mortgage?
First time home buyers who plan to move in less than 7 years, buyers who move a lot for their job or customers who have a specific strategy to accelerate the payoff of their mortgage in less than 10 years are the ideal borrowers for an adjustable rate mortgage.