What is an Adjustable Rate Mortgage: ARMs Explained

If you’re familiar with the homebuying process, you’re aware of what a mortgage is and the typical fixed-rate, 30-year loan.

Whether you plan to move again in a few years or you’ve found your forever home, 30 years can seem like an intimidating amount of time – especially when considering interest rates.

Fortunately, there are other types of mortgage options available. One that tends to gain popularity when interest rates climb is the adjustable-rate mortgage.

What is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage (ARM) is fixed at one rate for a certain period of time, then changes to another rate once that period expires, and continues to change based on the market.

This translates into ARMs having two different periods: fixed and adjustment. The fixed period is the initial period the rate is locked in for – typically three, five or seven years. The adjustment period comes once the fixed period has ended and the rate changes periodically.

Two popular types of ARMs are the 3/1 and the 5/1. With a 3/1 ARM, the fixed period is for three years, then the adjustment period changes rates once per year. The 5/1 ARM is similar, except the fixed period is for five years.

There are also 7/1 ARMs, which have a fixed period of seven years, and even 10/1 ARMs, which are fixed for 10 years.

When to Get an Adjustable-Rate Mortgage

We mentioned earlier that an adjustable-rate mortgage can be for anyone. Here are some examples of scenarios when an ARM would make sense for buyers.

Increased Interest Rates

For example, an adjustable-rate mortgage may make sense when interest rates are climbing.

Imagine that you’re in the early stages of buying a new home, and interest rates are high. You may be watching your monthly mortgage payment spend and considering what is a comfortable amount. It’s financially doable, and you still qualify, but it’s not the payment you planned to budget for.

Don’t panic – this is a great time to look into securing an adjustable-rate mortgage. You’ll likely be locked in at a significantly lower rate than the average fixed rate.

Once that fixed period is up, you’re likely to have more income and savings compared to when you originally got your loan. You can afford the higher interest rate now because, as time has passed, you’ve become more financially secure.

However, if you’re not happy with the new rate, you have options.

As your personal financial status has evolved, based on historical data, the economy is also bound to have changed. Check interest rates to see if they’re lower than your new rate. If you’re more comfortable with the national rate, you have the option of refinancing your home.

First-Time Homebuying

Experts have determine homeowners stay in a starter home for no longer than five years, and most abide by that. That’s mostly because families grow out of their homes quickly as they start having kids and accumulating things together.

This is a perfect scenario when an adjustable-rate mortgage makes sense. Since ARMs tend to have lower rates than fixed-rate mortgages, you can save more.

With an ARM, you have a plan: you lock in a lower interest rate than average, and you have a timeframe in which you anticipate moving out of your starter home – and that’s before the fixed period ends.

If you’re ready to buy, you have options.

The sales associates at Gehan Homes and our preferred lender partners can help you understand the mortgage process and which mortgage is a good fit for you and your family.

We believe happiness starts at home, and we’re here to help you find the perfect house for you and your family. Fill out the form below to get started.

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