What is an adjustable-rate mortgage otherwise known as an ARM?
Written by Brian DesPlaines from Centurion
An ARM is a loan that has a fixed rate for a period of time (3, 5, 7, or 10 years).
After that initial fixed-rate period, the rate adjusts periodically (every 6 or 12 months).
The rate adjustments can be up or down, are based on a defined formula, and have limits as to how much they can move at each adjustment and over the life of the loan.
What are the benefits? Because you’re taking on some risk with a rate that adjusts in the future, the lender compensates you in the form of a lower rate. In addition, you may not even be in the loan when the adjustment date arrives.
*Refinancing your mortgage is an option at ANY TIME. When interest rates come down, you can refinance your mortgage into a fixed 15/30 year mortgage.
What are the risks? You won’t know for certain what the rate will be down the road. However, since there are limits to how much the rate can change, you are protected. Mortgage lenders also take this into account and make sure that you qualify for the loan, even if the rate increases in the future.
November Market Update
As we approach the end of 2022, housing experts have a watchful eye on the economy. As you know, the housing market is still being pulled in all directions by rising interest rates. While housing has been the ROCK STAR of the U.S. economy the last few years, there are signs that things are slowing temporarily. For instance, the 30-year fixed mortgage rate hitting a 20-year high at 7.08% by late October will make it harder for SOME buyers to access affordable housing.
However, for those buyers who are ready to act and can access a pre-approval through a lender, there are some key differences to consider in a cooling market.
1. Less competition. This notable and largest advantage provides an opportunity that we have not experienced in the past two years. Buyers, the overarching benefit that there is less competition, is a reality. During a low interest environment over the past two years, there were too many buyers competing for a historically low inventory of homes for sale. The supply and demand of inventory made it almost impossible to find a home. Additionally, inflation created price points that were not sustainable. Higher interest rates reduce the number of buyers who qualify for a mortgage loan, this is a major contributing factor that goes into a less competitive category and buyer advantage.
2. Offer to Purchase contingencies. In the past two years, home inspections were waived, cash offers became more common and home sale contingencies were not accepted. Buyers AND sellers can now expect an offer to purchase to include healthy and important contingencies such as a home inspection. (It is our opinion that this is both a positive for buyers and sellers).
3. A wider variety of loan products. With historical lows in interest rates, fixed 15–30 year mortgages were a no-brainer. But in a cooling market where interest rates are climbing quickly, a buyer needs to consider alternatives. Look no further than a 5-7 year Adjustable-Rate Mortgage (ARM). An ARM allows for the consumer to lock into a mortgage rate for a short time yet allows for that same consumer to refinance when rates settle down. Please read the beginning of this post to learn more about this great option.
At Double Boldt Real Estate, we go the extra mile, deliver results, and always do the right thing.
Contact a Double Boldt expert for guidance on YOUR shifting market locally.
A big “thank you” to Brian DesPlaines from Centurion for his article about ARM.