Lenders have many types of home loans available, and the adjustable rate mortgage remains a preferred choice. Well known for their low-interest mortgage rate and less strict approval requirements, an adjustable rate mortgage appeals to first-time buyers and established homeowners as an attractive money-saving loan product. If you are considering buying a house or refinancing an existing mortgage, here is what you need to know about an adjustable rate mortgage.
What is an Adjustable Rate Mortgage?
Often called an ARM by lenders, an adjustable rate mortgage is a home loan product with a variable interest rate. Qualified borrowers typically begin repayment with a fixed rate for a set period of time. Once the fixed-rate period ends, the current mortgage rate will be applied to the balance at set intervals.
Changes to the mortgage rate are based on a benchmark index that reflects conditions in the lending industry. Depending on the terms of the adjustable rate mortgage, changes may occur on a monthly or yearly basis.
How Does an Adjustable Rate Mortgage work?
Once a local lender has approved the home loan, the borrower makes monthly payments much like other types of mortgage loans. Although the mortgage rate may fluctuate, repayment schedules are usually fixed at a set number of years.
Unlike other types of home loans, qualified borrowers may decide they feel comfortable keeping the initial mortgage rate over the life of the loan or allowing it to fluctuate. A local lender may provide an opportunity to lock in the initial rate. It’s generally worthwhile to discuss this process with a loan professional at a credit union. That’s largely because credit unions offer among the lowest adjustable rate mortgage loans with flexible terms.
How Does an Adjustable Rate Mortgage work?
Once a local lender has approved the home loan, the borrower makes monthly payments much like other types of mortgage loans. Although the mortgage rate may fluctuate, repayment schedules are usually fixed at a set number of years.
Unlike other types of home loans, qualified borrowers may decide they feel comfortable keeping the initial mortgage rate over the life of the loan or allowing it to fluctuate. A local lender may provide an opportunity to lock in the initial rate. It’s generally worthwhile to discuss this process with a loan professional at a credit union. That’s largely because credit unions offer among the lowest adjustable rate mortgage loans with flexible terms.
Different Types of Adjustable Rate Mortgage?
Just as there are many types of home loans, not every adjustable rate mortgage is the same. The 5/5 ARM ranks among the more popular options based on its convenient repayment terms and long-term savings.
The 5/5 ARM allows borrowers to start with a five-year fixed-rate period before changes occur. This aspect remains particularly attractive to first-time buyers who desire static monthly expenses as they pursue career opportunities and grow their families.
This type of adjustable rate mortgage typically offers low initial rates that help tamp down expenses for borrowers. With a 5/5 ARM, the mortgage rate changes every 5 years, rather than yearly in some cases. Although the 5/5 ARM continues to prove an attractive type of home loan, other adjustable rate mortgage options include the following.
- 10/1 ARM: These types of mortgage loans set a fixed rate for 10 years, followed by yearly changes.
- 5/6 ARM: This type of adjustable rate mortgage offers a fixed rate for five years, followed by changes every six months.
- 7/6 ARM: These types of home loans maintain a set mortgage rate for seven years, followed by changes every six months.
- 10/6 ARM: This home loan offers a 10-year fixed mortgage rate period, followed by changes every six months.
When considering the types of home loans that fit your needs, it’s essential to weigh adjustable and fixed mortgage products. The seemingly slight nuances can make a significant difference in terms of repayment and fitting into household budgets.
How are Adjustable Rate Mortgage Loans different from Fixed Mortgage Loans
On the surface, the primary difference between an adjustable rate mortgage and a fixed-rate home loan appears to be repayment terms. Adjustable options come with a fixed period that expires, followed by a period subject to change. The fixed-rate mortgage establishes one monthly loan payment that remains the same.
ARM’s are also known for offering lower rates and processing fees when compared to a fixed mortgage loan. Homebuyers can take advantage of adjustable rate mortgage loans by enjoying the low introductory period and strategically refinancing later. When rates tick up, borrowers can refinance down. And when the mortgage rate drops, homeowners enjoy something of a windfall.
Are there Down Payments for Adjustable Rate Mortgage Loans?
Another perk that comes with selecting an adjustable rate mortgage involves flexible down payment options. Applicants with a reasonably sound credit score, debt-to-income ratio, and repayment history may be able to put down as little as 5 percent.
Putting a larger down payment may help improve the mortgage rate and terms for these and other types of home loans. Community members who served in the military may be eligible for zero-down ARMs.
Refinancing an Adjustable Rate Mortgage Loan
There are two schools of thought surrounding adjustable rate mortgage refinancing. Some borrowers save money during the introductory period and refinance to another type of home loan before it expires. This makes sense if mortgage rates are likely to climb to an uncomfortable level. Some homeowners with fixed-rate mortgages also refinance into one of these types of home loans to lower monthly payments.
The key to refinancing into or out of an adjustable rate mortgage is generally driven by savings. It’s crucial to discuss all of the options with a loan professional at a credit union.
How to Apply for an Adjustable Rate Mortgage
Applying for an adjustable rate mortgage can be a relatively simple process. Start by reviewing your finances and get a copy of your credit report. Lenders usually prefer applicants with FICO scores of 580 or higher, but credit unions enjoy some discretion. Tweak your monthly expenses to align your debt-to-income ratio to less than 50 percent. Then contact a loan specialist at Allegiance to discuss the right home loan for you and your family.
