Years ago, an adjustable-rate mortgage (ARM) was almost like a bad word. After the financial crisis and the housing collapse, a lot of people blamed much of that on adjustable-rate mortgages. I personally believe that that’s because people who shouldn’t have taken on ARM loans were enticed to purchase them by mortgage originators.
How does an ARM loan work? It’s actually quite simple: Your rate is fixed for a period of time (often five to 10 years), and then it becomes variable based on an index. If the index in the open market is moving higher, your rate will move higher as well.
One thing I do like about adjustable-rate mortgages is that the initial rate is much lower. The difference between an ARM and a 30-year fixed mortgage is typically about three-quarters of a percentage point. If you’re buying your first property or a home you can stay in for seven years or less, taking a 7/1 ARM and capitalizing on the interest rate differential will save you a tremendous amount of money over time.
You do need to be careful, however; be sure to have an exit strategy. You’ll need to improve your current financial state or you’ll have to be prepared to refinance out of the ARM within seven years if rates look like they’ll be higher on your current mortgage.
Ultimately, ARMs are nothing to be scared of if you understand them. If you’d like to learn more about this and other types of loans, feel free to reach out to me. I’d be happy to help.