As mortgage rates continue to rise, more Americans are being priced out of the housing market. With this said, more of these borrowers are choosing an adjustable-rate mortgage to obtain a lower rate. An adjustable-rate mortgage (ARM) is a home loan with an interest rate that adjusts over time based on the market.
How does an adjustable-rate mortgage work?
ARM’s are long-term home loans with two periods known as a fixed-period and an adjustable period.
- Fixed period: During the initial fixed period, your interest rate will not change. This period typically lasts for the first 5, 7, or 10 years of the loan.
- Adjustment period: Since an ARM is based on a certain benchmark, this adjustable period will allow for your rate to either go up or down based on the specified benchmark.
As an example, a 30-year ARM with a 5-year fixed period would mean a low, fixed rate for the first 5 years of the loan. After this period of time, your rate could go up or down for the remaining 25 years of the loan. Typically, in order to qualify for an ARM, you will need at least a 620 FICO® Score.
Summary
Although many Americans think about the 2008 collapse of the housing market when they hear about ARM loans, the traditional adjustable-rate mortgages some buyers are taking advantage of now are far different from the subprime lending that took place before the last housing crash. As opposed to what took place in the years leading to 2008, lenders nowadays have much stricter lending practices and ensure that buyers are well qualified for home loans. All in all, borrowers are choosing an adjustable-rate mortgage due to skyrocketing home prices combined with steadily rising mortgage interest rates.
Are you looking to buy a home in the South Florida market? We can help. Contact Natasha at Live South Florida Realty, Inc. today! While you are at it, don’t forget to download the free Florida Home Search app.
