What Attracts Borrowers to Adjustable Rate Mortgages​?

Fixed rate mortgages once dominated the market on the residential level, with guaranteed monthly payments and reliability. However, adjustable rate mortgages (ARMs) have gained popular among savvy shoppers that are familiar with their inherent nature. While ARMs would be risky by virtue of their unpredictability, there are appealing characteristics that qualify them as the ideal choice among the ideal consumer under certain conditions – especially as many compare mortgage rates in South Carolina and other competitive markets.

How Do ARMs Work?

Adjustable rate mortgages function differently than fixed-rate mortgages. They typically have an interval during which the rate of interest is fixed – typically 3, 5, 7, or 10 years – when your rate remains stable. Once the introductory interval is over, the ARM rate periodically adjusts depending on the market and an agreed margin plus an index rate.

Typical ARMs contain protection in the form of caps that limit how much your interest rate can increase. The caps establish the number of times the rate can increase and the duration of the loan, providing a mechanism against drastic rate jumps that would make payments unsustainable.

Low Initial Interest Rates Spur Attraction

What attracts borrowers to adjustable rate mortgages? The most attractive part about ARMs is a lower starting interest rate than on fixed-rate loans. The answer lies in the difference – a typical 0.5% to 1.5% less than current fixed levels. For the borrower on the mortgage, that would mean less expensive monthly mortgage payments during the early years.

Begin with a $400,000 mortgage: the difference between a 6.5% fixed and a 5% ARM could put you up by more than $350 per month in the early years. Those dollars go into the kitty to fund other financial objectives, improvements to your home, or the establishment of emergency funds.

Market Timing Provides Opportunities

ARMs truly come into their own especially under particular market conditions. When the rate increases or is likely to increase, the upfront benefit from an ARM mortgage low rate increases. There are opportunities for the borrower to take advantage of low levels now while possibly refinancing before the adjustment periods commence should levels remain higher.

However, when the rates rise but are expected to decline, the ARMs prevent the borrowers from the market until the rate declines. The borrowers have potential to benefit from the future savings when their rate declines. So, what is an advantage of an adjustable rate mortgage? Flexibility to capitalize on favorable market conditions is high on the list.

Best Suited for Short-Term Ownership Plans

ARMs suit best the plans of the people who will resell the loan or refinance the loan before the end of the first fixed period. If you move to a distant location due to employment reasons, move into a larger house, or repay the loan within the introductory phase, the low rates of the ARM come risk-free to you.

This plan is especially effective among army families, corporate professionals whose relocations happen on a regular interval, or first-home buyers expecting to move higher on the property ladder within a few years – these groups often realize the unique benefits of an ARM loan.

Making Strategic Mortgage Decisions

Adjustable rate loans are not suitable for all borrowers or all situations, but there are definite benefits to the right borrower in the right situation. The trick is to impartially evaluate an individual risk tolerance level, long-term goals, and capacity to handle potential increases in payments.

Consulting seasoned brokers at BrickWood Mortgage will allow you to make an informed decision regarding whether an ARM is right for you. We can describe various structures on ARMs, compare them to traditional fixed-rate programs, and lay out the benefits and the risks in order for you to make this financial decision.