An adjustable-rate mortgage (ARM) is a type of home loan with an interest rate that changes over time. The initial interest rate is typically lower than that of a fixed-rate mortgage, but it can go up or down after the introductory period ends. This means that your monthly mortgage payments could also go up or down. With interest rates continuing to rise, we are seeing more buyers turning to an ARM.
An ARM is often used by borrowers who plan to stay in their homes for a shorter period of time, such as 5 or 7 years. This is because the initial interest rate is lower, which can save borrowers money in the short term. However, if interest rates rise after the introductory period ends, borrowers could end up paying more for their mortgage. There are different types of ARMs, each with its own set of terms and conditions. Some ARMs have caps on how much the interest rate can increase, while others do not. It is important to read the terms of your ARM carefully before you sign the loan documents.
Pros of an ARM
- Lower initial interest rate
- More flexibility if interest rates rise
- Can save money in the short term
Cons of an ARM
- Interest rate can go up after the introductory period ends
- Monthly payments could go up
- More risk if interest rates rise
Who is an ARM good for?
An ARM can be a good option for borrowers who plan to stay in their homes for a shorter period of time and can afford any potential increases in their interest rate. They can also be a good option for borrowers who are willing to take on more risk in exchange for the potential to save money in the short term.
The median tenure for a homeowner to remain in their home has increased over the past few years. As of 2022, the average tenure for Americans to remain in their homes is 13.2 years. In fact, 35% of homeowners have lived in their homes for 10 to 15 years. Meanwhile, 16% have lived in their homes for less than 5 years. Regardless, the decision to obtain an ARM will depend on your personal circumstances. If you are considering an ARM, it is important to talk to a mortgage lender to discuss your individual circumstances. The lender can help you determine if an ARM is right for you and can help you find the best ARM for your needs.
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