What You Should Know about Adjustable Rate Mortgages

You may have heard the term "adjustable-rate mortgage" (or "ARM"). But what exactly is it? And should you consider getting one?

A mortgage is a loan that helps you purchase a home. An adjustable-rate mortgage works similarly to other mortgage loans, but with one key difference: the interest rate can change over time. This means your monthly payment could increase or decrease depending on changes in interest rates. 

ARMs can be a good option for some borrowers. For example, if you expect to sell or refinance your home before the adjustable period begins, an ARM may allow you to benefit from a lower initial interest rate.

However, there are also risks to consider. If interest rates increase, your monthly mortgage payment could rise.

here's what we will cover

what's an adjustable-rate mortgage (arm)? 

An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate may change periodically after an initial fixed-rate period.

Many ARMs begin with a fixed-rate period, commonly 7 years, after which the interest rate adjusts periodically based on market conditions. For example, with a 7/1 ARM, the interest rate remains fixed for the first 7 years and then adjusts once per year for the remainder of the loan term.

ARMs are often used by borrowers who expect to sell, refinance, or pay off their mortgage before the adjustment period begins.

ARM vs fixed-rate mortgage 

Fixed-rate mortgage loans have interest rates that remain constant for the entire life of the loan, making them a predictable option for borrowers planning to stay in their homes long term.

ARMs typically start with a lower initial interest rate, but the rate can adjust after the fixed period ends, which means monthly payments may change.

what are the benefits and risks of an ARM? 

Benefit 

• Potentially lower initial interest rate than fixed-rate mortgages
• Greater flexibility if you plan to move or refinance within a few years
• Interest rate caps limit how much the rate can increase
• Opportunity to pay down principal faster while rates are lower
• No prepayment penalties, meaning you can sell or refinance at any time

Risks

Potential risks associated with an ARM include:

• The possibility of higher payments if interest rates rise.
• There's a chance that you may not be able to sell your home or refinance when you want. If your interest is at a fixed rate and you're not able to handle the payments, you could risk losing your house.
• Unlike fixed mortgage rates, ARMs could be confusing since there are fees and structures like how often your rate adjusts. You would have to stay mindful of the changes and be prepared for the worst-case scenario.

For borrowers who are willing to take on a little extra risk, an ARM can be a great way to save money and get a flexible repayment plan.

when does it make sense to do an arm?

• When you don’t plan to stay in the home long term: If you expect to sell your home within 5–7 years, an ARM may allow you to benefit from a lower initial interest rate and save money during the fixed-rate period.

• When there's a significant rate difference: Sometimes ARMs offer noticeably lower starting rates than fixed-rate mortgages. If that’s the case, choosing an ARM may help reduce your payments early in the loan. 
  

  Example 1

  Melissa recently opted for a 7/1 ARM with a 5.50% interest rate to purchase her $360,000 home in Charlotte, North Carolina, instead of a 30-year fixed-rate mortgage at 6.75%.

  Because her interest rate is fixed for the first 7 years, Melissa expects to save thousands in interest during that period compared to the fixed-rate option.

  Since she plans to relocate within 5–6 years, the ARM allowed her to take advantage of the lower starting rate without worrying about future adjustments.

  Example 2

  Matthew, a financial planner in Greensboro, recently purchased a home that he plans to live in for about seven years before moving closer to family.

  He chose a 7/1 ARM because it offered a lower starting interest rate compared to a traditional 30-year fixed mortgage. The lower rate allows him to reduce his monthly payments while aggressively paying down the principal during the fixed-rate period.

  If his plans change, Matthew also has the option to refinance into a fixed-rate mortgage before the adjustable period begins.

   
   
  

Ultimately, it's important to weigh all your options and consult with a mortgage specialist to see what makes the most sense for your unique situation.

how can I get an arm? 

If you're interested in getting an ARM at Skyla, here's what you'll need:

• Established credit (A good credit score will increase your chances of getting a low-interest rate)
• Down payment (or home equity this would be the actual property's current market value. if you're refinancing)
• Proof of income (30 days of your most recent paystubs)
• W2s (bring 2 years of your most recent W2s )
• Bring 60 days of bank statements if you're coming from another financial institution.
• Two most recent years of tax returns if you’re self-employed 
• Additional verification information (auto loan, credit card, most recent retirement account statement)

The documents will help our Mortgage Loan Officers verify your income and funds for a down payment, reserves, and closing costs.  

how do i know if an arm is right for me?

When considering whether an adjustable-rate mortgage is a right choice for you, it's important to think about your long-term plans. If you anticipate selling the property or paying off the mortgage within a few years, an ARM could save you money. However, if there's a possibility that you'll still be in the home when the adjustable rate kicks in, you could end up paying more than you would with a fixed-rate mortgage. But that's ok because you don't have to stay with your ARM, you can refinance and switch to a fixed mortgage.

When considering an ARM ask yourself these questions:

• How long do you plan on being on that property?  
• How often will your interest rate change? 
• Are you prepared if your payments were to increase?
•  What ARM options does your lender offer? 

If you prefer predictable monthly payments, a fixed-rate mortgage may be the better fit.

If you're still not sure whether an ARM is right for you, our Mortgage Loan Officers are here for you. You can send an email, give us a call at 704.375.0183 x 1525, or visit any of our branches.