ARM (Adjustable-Rate Mortgages): What They Are and Does it Pay to Use One

ARM (Adjustable-Rate Mortgages): 

What They Are and Does it Pay to Use One

The rise of interest rates has once again revived the interest in ARM (Adjustable-Rate Mortgage) financing. 

Previously, while FIXED interest rates were historically low, there was little need or interest from borrowers to utilize them.

But is this sudden interest in ARM loans a good thing or bad? And is it appropriate for the times?

First, we'll need to know exactly what an ARM is and how it works ...

ARM is an acronym for (Adjustable Rate Mortgage). You'll also frequently hear them referred to as a "variable-rate" or "floating" mortgage.  Why?  Because ARM loans have a variable interest rate, meaning their rate can go up or down.  

During their initial period, an ARM loan's interest rate is the same throughout that 3,5,7, or 10 year period.  After this initial period concludes, the interest rate resets in intervals based on a benchmark or index plus the addition of an ARM margin. The index and the margin are pre-determined and disclosed to you as the borrower at time of application and again prior to and at closing.

ARM loans come in 3 forms:  Hybrid, Payment-Option, and Interest-Only.  Here's the definition of each:

1. Hybrid Adjustable-Rate Loans (as defined by Fannie Mae): Combine the features of fixed-rate and ARM Loans, and has a total term of 30 years, consisting of an initial term when interest accrues at a fixed rate, followed by the remaining term, during which interest accrues at an adjustable rate
2. Payment-Option ARM (as defined by ConsumerFinance.gov): An adjustable-rate mortgage with several possible payment choices
3. Interest-Only ARM (as defined by Investopedia.com): A mortgage loan in which the borrower is only required to pay the interest portion owed each month for a certain period of time and a borrower is not required to pay down any principal owed

Each borrower individually should assess the pros and cons of ARMs and their specific terms as it pertains to their own personal needs and finances. 

Performing this assessment weighs and measures the level of risk the borrower can sustain during the term of an ARM loan.  

What are the pros and cons of the typical ARM loan?

The positives or pros of an ARM are:

• ARM loans generally come with an initial interest rate that is lower than a comparable fixed-rate mortgage
• Flexibility:  If a Borrower plans on selling their home during the initial period of the loan and prior to interest rate changes, they may save on interest charges incurred
• Because lower interest rates and payments are in play early in the loan, lenders can consider the lower amount when qualifying a borrower on ARM loans with initial set periods of 5 years or longer (which can translate to more buying power)
• Should interest rates fall, ARM borrowers are able to take advantage of lower rates without refinancing 

The negatives or cons of an ARM are:

• Changes in Interest Rates (Market Rates) could change the Borrower's monthly payment. (A cap on how high the rate can go over the life of the loan exists)
• There is less stability than a fixed-rate mortgage
• The rate to which the loan will "adjust" is unknown
• Vulnerability: Negative changes in your credit status could impede refinancing to a more favorable interest rate or loan program in the future
• ARM loans are typically more complicated or nuanced than fixed-rate mortgages. The need for a borrower to fully understand the terms of their loan is vital

When is it a good idea to consider an ARM?

Arms can be appropriate IF:

• The initial rate is lower than the current fixed rates
• The initial rate (known as the start rate) is for at least 5, 7, or 10 years in length BEFORE it would adjust
• The Borrower intends to sell, refinance, or pay off the ARM loan before the adjustments start
• The Borrower fully understands the effects of ... and is prepared for ... the adjustments in terms of potential increases in rates and payments

There is no one set or universal answer regarding the "appropriateness" or wisdom of utilizing an ARM.  That answer relies upon the borrower's individual and specific finances, needs, and desires.  And it must be added, their comfort level of dealing with potential risk.

The good news is that there are many mortgage options to consider and choose from today.  To fully understand all your options and to make the best decision for yourself, talk to a lender as soon as you decide to buy.  

Take the time to learn the pros and cons of each option available as it pertains to you personally.  Then you can move forward and make a decision knowing you're fully educated and fully informed, basing your decisions on the facts as they pertain to your specific needs.

Are you hoping to Construct, Buy, Refinance or Purchase a home or investment property in Chicagoland or somewhere else in Illinois or Wisconsin?

Looking for mortgage financing answers, options, solutions, and experienced assistance?  Contact me! I'll put my 40 years of Mortgage experience and expertise hard to work on your behalf.  

I'm easily found at:

Gene Mundt

Mortgage Originator  -  NMLS #216987  -  IL Lic. #031.0006220  -  WI Licensed

American Portfolio Mortgage Corp.

NMLS #175656

Direct:  815.524.2280

Cell/Text:  708.921.6331

eFax:  815.524.2281

gmundt@goapmc.com

www.genemundt.com

              

      

Gene Mundt, Mortgage Originator, an Originator with 40+ years of mortgage experience, will offer you exemplary mortgage service and advice when seeking: Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago and the greater Chicagoland region, including:

The Lincoln-Way Area, Will County, (New Lenox, Frankfort,

Mokena, Manhattan, Frankfort Square, Joliet, Shorewood, Elwood, Lockport, Wilmington, Crest Hill, Symerton, Braidwood, Channahon, University Park, Beecher, Plainfield, Bolingbrook, Romeoville, Tinley Park, Homer Glen, Crete, Peotone, Naperville, etc.), DuPage County, Kane County, Grundy County, the City of Chicago, Cook County, and elsewhere within IL & WI.

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