An adjustable-rate mortgage
Should be Considered by Borrowers
06/09/2022
As mortgage rates in recent weeks have soared to levels not seen in more than a decade, home loan borrowers are considering their financing options. According to the Mortgage Bankers Association, in the first week of May, about 11 percent of mortgage applications were for adjustable-rate mortgages (ARMs), almost twice the share of ARM applications three months ago when mortgage rates were low.
According to some seasoned experts, borrowers are now more open to ARMs because of the potential savings. Each situation is different, but we see interest from first-time and repeat buyers. More and more borrowers are definitely reviewing their options related to adjustable-rate mortgages versus fixed-rate mortgages. Repeat buyers are relatively open to choosing an ARM, while most first-time home buyers are still continuing with 30-year fixed-rate mortgages.
When interest rates rise, borrowers want an ARM for the following reasons:
Firstly, an ARM is still beneficial if borrowers know they won't be carrying the property for the typical 15- or 30-year period of a fixed-rate mortgage. Secondly, the report found that housing affordability worsened - but not everywhere. When interest rates rise, borrowers are more likely to consider an ARM in the hope that rates will fall in the future. Thirdly, some borrowers may know they will only own the property (or finance it) for 5 to 10 years, making an ARM ideal for their financial plan.
Advantages of ARMs
ARMs have lower interest rates during the initial period (e.g., 5, 7 or 10 years), so the monthly mortgage payment is significantly lower than a 30-year fixed-rate loan. Even if interest rates adjust higher in the future, borrowers typically receive more income by then. ARMs provide increased cash flow because the interest rate associated with the fixed-rate portion of the mortgage is lower until interest rates adjust. ARMs will allow borrowers to more comfortably afford a more expensive home at a lower repayment rate.
Disadvantages of ARMs
ARM rates are usually lower than fixed-rate mortgages. However, homeowners will be subject to market fluctuations and unpredictable interest rates. If interest rates rise much higher, it could significantly increase borrowers’ housing payments and potentially put them in financial difficulty. No one knows exactly what will happen to interest rates. If interest rates rise, borrowers may be in the best financial position to handle higher repayments. The downside in an ARM has to do with the uncertainty of the future of the interest rate environment. A 2% increase in interest rates on a $500,000 loan (from 4% to 6%) would increase principal and interest by $610 per month.
How did ARMs work?
ARMs typically have a 5, 7, or 10 years initial fixed-rate term. Once the fixed-rate term expires, the interest rate is usually adjusted every six months or annually.
Borrowers ' fixed rates are lower for the initial loan term, usually 5, 7, or 10 years. Depending on the terms of the borrower’s loan, the interest rate may increase by 2% per year at the end of that term, but will not exceed 5% for the life of the loan. Interest rates may also decline. After the initial fixed-rate period, borrowers’ new payments will be adjusted based on the principal balance at that time. For example, the interest rate may increase by 2%, but the loan balance of borrowers may decrease by $40,000.
Beneficiaries and Non-beneficiaries of ARMs
An ARM may be a good option for borrowers who know they will not keep their property longer than the fixed-rate term of the ARM. ARMs are an option if the borrower has the financial ability to withstand significant interest rate fluctuations and possibly higher repayments. Some borrowers also choose ARMs if they are convinced that the current trend of high and rising interest rates is unsustainable and that rates will fall and allow them to refinance in the future. However, most borrowers prefer the financial security of a fixed-rate mortgage product.
If borrowers have good financial discipline, ARMs are viable options. If they carry a large amount of debt that may increase over time, an ARM may be financially dangerous. ARMs serve borrowers best who know that their mortgage will only be on the property for the initial fixed-rate period. This situation avoids the uncertainty of future interest rates.
Statement: This article was edited by AAA LENDINGS; some of the footage was taken from the Internet, the position of the site is not represented and may not be reprinted without permission. There are risks in the market and investment should be cautious. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, opinions or conclusions contained herein are appropriate to their particular situation. Invest accordingly at your own risk.
Post time: Jun-10-2022