Adjustable Rate Mortgages – may be just right for your circumstances but not that much different from today’s fixed-rate trends… they are often called an ARM loan
Understanding the Adjustable-Rate Mortgage Definition
An adjustable-rate mortgage loan is one in which the interest rate changes periodically for a set period of time, (depending upon the type of ARM product). *See these explained below in FNMA And Freddie Mac ARM Products.
These loans are usually pre-determined by a set index. Some may be a fixed rate for a set number of years, then adjust to the adjustable rate feature. One example is a 3/6 ARM loan is fixed for the first 5 years of the loan, and then adjust to a fluctuating rate every 6 months. Others are 5/6, 7/6, 10/6, etc. **This is updated as the LIBOR ARM loans have been 5/1, etc. have been retired and the adjustments are now based upon the – Secured Overnight Financing Rate (SOFR) for newly originated loans
Interest rates trend- As of Today 03-22-23 **
Trending Interest Rates re: Mortgage News Daily- Fixed Rate 30 yr- 6.45% +-. Adjustable mortgage rates today – 5/1 **as listed on MND- ARM 30 Yrs – 6.51% +- depending upon the lender. * The rate will adjust after the first 5 yrs., then every year thereafter. * but changes have been made to FNMA/FHLMC ARMS. *see above
Interest rates are going up steadily and the Adjustable Rate Mortgages rates can be more favorable in some instances. Especially to those applicant(s) who need the lowest payment options when applying for a Conventional Loan Product.
It might be wise to see if you could qualify for the FHA “Fixed” loan product as those rates are slightly lower, and re: Mortgage News Daily’s trends- are slightly lower at 5.75% for a 30-year fixed. * as of 3/22/23 This may change today or tomorrow
However, with fixed rates, as shown above, it seems that this would be a rare case.
*That is not a quote -it is a trend and different lenders may give you a different quote regarding the type of product and credit you have and other factors we do not know.
Adjustable-Rate Mortgage vs Fixed-Rate
Fixed Rate Mortgage loan rates are inching up, and if you read online the trend is that they will keep rising. However, with these loans, you have a fixed rate for the life of the loan. No adjustments. Amortization is 30, 20, 15, and 10 years.
The ARM (Adjustable Rate Mortgage) is a lower rate (in most cases) for the first few years of the mortgage loan. As we state below, there are different product types of ARMs that you can inquire about, but be very careful. These loans can be very catchy with adjustments beginning after the initial adjustment period. However, if you understand the product and what you are getting into, the ARM is an option.
Adjustable-Rate Mortgage Pros and Cons
Adjustable-Rate Mortgage Pros:
- ARM loans may be helpful for someone who is transferred with their employer on a regular basis, every 3 to 5 to 10 year period, etc.
- You have the advantage of the lower rate until you refinance, and some loans may have the option that the loan can be modified.
- You have a lower rate if you plan to pay off the loan before the first adjustment.
- If the overall interest rates decline, then at the initial adjustment period, the ARM rate would also decline.
Adjustable-Rate Cons Of ARM Loans ** we do not like to be negative- we will call this a warning…
The negative about ARM loans:
- The interest rate WILL NOT stay the same for the life of the loan. I am very adamant about this due to the following: I have seen borrowers get loans with interest rates very low right before the mortgage meltdown. But, guess what, their rate changed every 6 months. *LIBOR ARMs will no longer be purchased by FNMA, see above.
- ARM loans always adjust from that initial rate. Remember the loan will adjust every 6 mons*new guidelines after the initial period for 5, 6, 7, and 10 yr periods…
It Is Important to Know How Your ARM Loan Rates Will Adjust
Before taking out an adjustable-rate mortgage, understand the terms:
- How high your interest rate and monthly payments can go with each adjustment?
- When and how frequently your interest rate will adjust?
- How soon your payment could go up?
- If there is a cap on how high your interest rate could go?
- When and if there is a limit on how low your interest rate could go?
- If you will still be able to afford the loan if the rate and payment go up to the maximum allowed under the loan contract?
Note That FHA (Federal Housing Association-the gov.) 1 & 3-year hybrid ARM loans have an adjustment of 1% after the first change date and a 5% life of loan cap. The 5, 7, & 10-year hybrid ARM has a 2% initial rate adjustment, after the first change date, with a 6% life of loan cap.
FNMA (Fannie Mae) and FHLMC (Freddie Mac)- the GSEs That Lenders Use to sell their loans-adjustable-rate mortgage example –
FNMA And Freddie Mac ARM Products are now changing, 3 yr, 5yr, 7 yr & 10-year adjustable loans (with a variety of different adjustments) after the initial fixed period of interest.
**Know your product: Please note that there are also ARM Loans that will adjust every 6 months after the initial fixed-rate period. Stay away from these unless you are moving, going to refinance, etc. after the initial adjustment. *There is 10/6 ARM, and others that adjust every 6 months.
Always note the terms-if you can convert to a fixed-rate loan, refinance, etc. after the initial fixed-rate term.
*Take notice of how much the interest rate will adjust when the initial fixed rate term has expired.
MY ADVICE..is simple. With the interest rates as they are at this immediate time…there is only about a .250 (+-) difference between a fixed rate 30 yr. long-term rate and an adjustable one.
A 5% adjustment or 2% in 7 or 10 years, could be excessive and would really make a big difference in your payment. As I have stated, each situation is different, therefore this might be a product you could afford if you know your earnings will increase to afford the much higher payment.
- I believe the FIXED RATE mortgage loan is the best advantage for now. Why? You have your rate over the life of the loan and if you qualify for this rate unless your earnings go down or you lose your job, with careful financial planning, you are set with the fixed-rate mortgage loan.
Now is the time for fixed-rate loans if there has ever been one due to the rates not being that much different. Why obtain an adjustable-rate loan when fixed-rate loans are only about .25 depending upon the lender, it could be less.
Think Wisely When Considering an ARM- here is why…
Some of the reasons that so many people obtained ARMs during the Subprime years was so that they could qualify (the debt-to-income ratio needed to be a certain figure) for the house that they wanted. The interest rates were higher. The sales prices were higher than the one they could qualify for if they chose a FIXED RATE product.
*Many made financial decisions that were not in line with their financial status. They bought more houses than they could actually afford. That is how many borrowers got into a financial crisis.
A fixed-rate product gives one an interest rate for the life of the loan. It stays at the same rate for the entire term, and will not adjust up or down, unlike the ARM (Adjustable Rate) loan product.
*Note: This post has been updated as of 2/10/22, and again today 10-19-22, and again on 03/22/23 for trending rates and ARM changes.
We always try to post the most updated changes, products, and parameters to loan products. However, changes occur frequently and we may miss something. Always check to make sure you are getting the latest and best product for your mortgage needs.
Linda Todd worked in Finance and Mortgage Lending Services for 38yrs +
Disclosure: We at Personal Finance Post try very hard to keep the latest updated information for you to read. However, mortgage news, guidelines, policies, and procedures change frequently. If something is missed or changed we apologize and will do our best to updated again soon.
