What is an Advantage of an Adjustable Rate Mortgage?

As you go shopping for a mortgage, there are two options that stand out for most, the fixed-rate mortgage and the adjustable rate mortgage (ARM). While the former has the same interest rate until the loan is repaid, the latter has interest rates that change periodically according to the market.

Most homebuyers will automatically default to a fixed-rate loan due to their stability, but ARMs also have some attractive benefits that may save you money or offer more freedom. Becoming aware of those benefits can help guide your decision as to which type of mortgage best suits your financial objectives as well as your situation, especially if you’re considering options like a bank statement mortgage in South Carolina.

Reduced Initial Interest Rates

Its largest positive factor is the low initial rate compared to the rate provided on the fixed rate loan. Its initial rate, also commonly called the “teaser rate,” nearly always doesn’t change during the initial period, typically ranging between one and ten years.

During this initial phase, your monthly payments will be lower than they would be under a similar fixed-rate loan. This dollar savings can be several hundred dollars each month, freeing up money that can be devoted to other uses, such as saving for emergencies, investments, or improvements to your residence.

Prospect of Minimum Payments Over Time

As opposed to the fixed-rate mortgage, there is the potential that your monthly payments would be less if market rates should fall. When your loan is adjusted back to a lower rate, your monthly pay is correspondingly reduced, which could save thousands over the loan term. What is an advantage of an adjustable rate mortgage? One key benefit is that borrowers automatically receive lower rates without having to refinance if the market drops.

This advantage becomes particularly valuable during periods of declining interest rates. While fixed-rate mortgage holders must refinance to benefit from lower rates, ARM borrowers automatically receive the benefit when their loan adjusts.

Increased Flexibility for Seasonal Homeowners

ARMs are best used as a financing product where the homeowners won’t be occupying the house long-term. If the homeowners assume they would be selling or refinancing the house within a period of five to seven years, they could benefit from the lower initial rates without the threat of the rates increasing that come later on the loan term.

This flexibility appeals most to first-time buyers, military families who expect to be relocated, or working professionals who expect transfers. You enjoy the benefit of lower payments during the period that you own your house without facing the long-term rate adjustment risks.

Simpler Qualification Criteria

Borrowers are usually qualified based on the first, lower interest rate that lenders offer. That would mean your debt-income ratio calculations would be based on the lower monthly payment, potentially qualifying you for a higher loan amount or meeting your lending need more readily.

This benefit is especially helpful to high-credit borrowers who have low income, self-employed borrowers who have fluctuating income, or those buying homes where the markets are very costly, where each dollar of purchase power counts.

Making the Right Choice Based on Your Situation

Advantages of adjustable rate mortgage options include lower initial rates, potential payment reductions, greater flexibility, and less stringent qualification standards. These positives have the potential to cause significant savings and broader homeownership accessibility among the right borrowers.

But ARMs also carry the potential for rate increases that would significantly increase your monthly payments. Consider your financial stability, tolerance for risk, and ultimate plans as a homebuyer before reaching a decision about an ARM. Work with reliable mortgage brokers at BrickWood Mortgage to learn whether an adjustable rate mortgage is best suited to your situation and objectives!