With interest rates climbing higher by the day, it pays to look for ways to save money on your mortgage. An adjustable-rate mortgage (ARM) is one of the most popular short-term strategies available. These mortgages reset and adjust their interest rates over the life of the loan, usually at intervals between two and five years. We will closely examine how these mortgages work and whether they’re right for you.
What is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage (ARM) is a type of mortgage that allows the borrower to make interest rate adjustments throughout the loan. The interest rate is usually tied to an index such as the U.S. Treasury yield or a market index like the S&P 500.
This type of mortgage works like an ordinary commercial property loan by charging you interest over the term of the loan. However, instead of tying your monthly payments to a fixed rate or index that remains the same throughout the loan’s lifespan, an ARM adjusts based on market conditions and consumer lending standards.
The lender assesses your credit and finances to determine your risk of defaulting on the mortgage and how much they are willing to lend you. Your mortgage would start with a fixed interest rate for the first interest period and adjusts based on your current credit score, how much you paid previously, and how much you’re expected to pay in the future.
Pros of ARMs
Unlike traditional mortgages that lock in long-term interest rates, ARM makes it easier for homeowners to make short-term lifestyle adjustments and minor property renovations without worrying about a sudden spike in their monthly housing cost or debt service obligations. It also offers flexibility as you can choose between locking in a lower rate for a limited time or paying extra when the rate is lower. Finally, ARMs come with a low introductory rate that makes it easier for borrowers to qualify for a loan.
Cons of ARMs
One of the potential drawbacks of ARMs is that your interest rate can increase during the term of the loan. This can happen any time, depending on how much you borrow over a certain period. If you don’t keep up with the payments, it can cause a huge financial strain on your budget.
Additionally, an adjustable-rate mortgage can make it difficult to budget. Since your interest rate could change at any time, it’s impossible to predict how much you’ll owe in the future.
Ultimately, ARMs are a good choice if you plan to own your home for at least five years. With an ARM, you’re guaranteed a fixed rate for the first few years to lock in savings from low-interest rates. This can make it easier to manage the monthly cost of your mortgage over time and gives you more flexibility when planning for long-term financial goals.
An adjustable-rate mortgage from blakemortgage.com may be a very convenient option if you’re a first-time home buyer, an outside investor, or a young couple looking to save for the future.