Adjustable-Rate Mortgages, or ARMs, sometimes get a bad rap in the lending world.
What is an ARM Loan?
An ARM Loan (Adjustable-Rate Mortgage) is exactly what it sounds like: it’s a mortgage loan that has an interest rate that can change, or adjust, over time. Rates usually hold for a certain amount of time and then begin to adjust based on the type of ARM Loan a borrower secured.
Many people are wary about ARMs because they were partially blamed for the 2008 Housing Crisis. However, the ARMs used then were far different from today’s and there were many other factors that contributed to the housing crisis (no income verification and no down payments, to name a few).
ARMs aren’t a bad thing and they don’t deserve the stigma they’ve been carrying since 2008. For some of our borrowers, ARMs are the best loan option available.
Who Should Get An ARM Loan?
ARM Loans are ideal for borrowers with shorter time-horizons. Very few borrowers ever keep their loans longer than seven years because of job changes, moves, refinancing, and other life changes. ARMs offer a more affordable and safe option for borrowers in the short term.
ARMs are ideal for buyers who are currently in a small home but plan to start growing the family. Buyers who know they will be transferred by their employer or will relocate for work in the next few years should consider ARMs. Elderly borrowers are also good candidates for ARMs. Lastly, ARMs are great options for buyers with ample cash reserves available to pay off their mortgages, or who plan to refinance (into a 30-year fixed or similar) soon after taking out their loan.
The ARMs that we see in today’s market are not only much safer compared to 2008, they’ve also become an increasingly popular financing option. Most of the ARM loans we see today are known as Hybrid ARMs. A Hybrid ARM combines the features of a fixed-rate and an adjustable-rate loan. The most popular Hybrid ARMs are the 5/1, 7/1, and the 10/1.
How do Hybrid ARMs Work?
Let’s say that a borrower took out a 5/1 Hybrid ARM. The rate for that loan will stay fixed for the first five years, and then after the fifth year, it will adjust every (1) year for the remaining 25 years of the loan (5/1 loans are paid over the course of 30 years).
Hybrid ARMs require full income documentation and substantial down payments. Borrowers should be aware that while their payments are the same for the first five years, they may increase or decrease as their rate adjusts.
30-Year Fixed-Rate Mortgages
30-Year Fixed-Rate Mortgages are still the tried and true mortgage product for many people. Most people can’t afford higher payments for 15-year loans. Shorter time periods mean higher monthly payments. A lot of borrowers prefer this financing option because it offers the most stability and predictability over the long term. The stability has a trade-off point—30-year fixed mortgages usually have higher interest rates in comparison to most ARMs.