Benefits of the Adjustable Rate Mortgage

If you do not plan on staying in your home for 30 years, why finance it for 30 years? It is a great question, especially for relocating employees who relocate often. While the 30-year mortgage is very popular, it is wise to consider an adjustable-rate mortgage (ARM) also.

What is an ARM?

ARMs have an interest rate that adjusts with the market one or more times during the life of the loan. What makes the ARM appealing is an introductory period where the interest rate remains constant for a set number of years before it adjusts. This rate is typically lower than that of a fixed-rate mortgage.

How does the ARM work?

Typically, ARMs have an introductory fixed rate period of 3,5,7, or 10 years. For example, a 7/1 ARM product indicates that after seven years the rate will adjust annually to the market. A 5/2 ARM would adjust after five years and then every two years.

ARMs also offer rate caps to ensure the rate does not jump substantially each time of an adjustment or gradually over the life the loan. For example, ARMs may only adjust 2% points up or down at each adjustment or 5% during the life of the loan.

Comparing an ARM to a 30-year fixed-rate mortgage

ARMs are popular with homebuyers because of the low introductory interest rate which means a lower monthly payment. Compare the monthly payment of a 7/1 ARM during the introductory period to the first seven years of a fixed product, is there cost savings? If so, this can add up during the introductory period and make ARMs valuable when owning a home for the short term.

Qualifying for an ARM

To qualify for an ARM, a homebuyer must be able to demonstrate the ability to make payments at the highest interest rate and fully payoff the loan within the amortization period.

We recommend consulting a Premia Relocation Mortgage Consultant to provide product options to fit your financial situation and do the math for you!