Adjustable-Rate Mortgage Explained

Today, we will discuss how an adjustable-rate mortgage (ARM) can help you save money and whether it is right for you. Keep reading to find out all you need to know about an adjustable-rate mortgage in 2022. 

What is an ARM?

An adjustable-rate mortgage is exactly what it sounds like. Instead of a mortgage rate, ARMs have dynamic rates that change over time. Most of the time the lowest interest rates occur at the beginning of the ARM, which gives you time to save money at first. But don’t forget, this rate will go up in the future. 

Types of ARMs

The most common ARMs are 5/5 and 10/1. The first number is the number of years the mortgage rate will stay the same. 5/5 ARMs have the same rate for the first five years, 10/1 ARMs remain the same for the first ten. The second number is the number of years in between mortgage rate adjustments. In a 5/5 your mortgage rate can change every 5 years after the initial 5-year period. In a 10/1 your mortgage rate will adjust every year. In addition to the 5/5 and 10/1 distinctions, there are also different caps that distinguish ARMs from one another. 

Different Caps

The initial adjustment cap determines how much higher or lower your rate can go up after the first five to ten years (the first number from earlier). Then there is the adjustment cap itself. This defines how much higher the rate can go up every time the adjustment period passes. This could be one or two percent every one to 5 years (depending on the terms). Adding one to two percent every year can make your mortgage rate very high, keep this in mind. The lifetime adjustment cap is your saving grace here. The lifetime adjustment cap defines how much your mortgage rate can go up over the loan lifetime. For example, your lifetime adjustment cap may be set at 20%, which means you will never pay more than 20% interest on the loan. 

Benefits of an ARM

As stated earlier, an ARM can make your initial mortgage payments really low since you start off with a low rate. This can help you save money to use for paying it off later. Because of this low rate, you also may be able to afford a more expensive home for the same price per month as a cheaper one. With an ARM you won’t have to refinance. The beauty of an ARM is that you can simply wait for the rate to go down instead of going through the trouble of refinancing. 

Contact Us

At Equity Mortgage, we work with a variety of clients with varying degrees of mortgage needs. We offer our clients alternative options to their current loan programs with our wide range of mortgage products and flexible lending practices. 

Experience fast, professional service for coronavirus mortgaging today and into the future. Contact us for more info or give us a call at 1-800-332-9221.

 


* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.