Not all buyers go for the tried-and-true 30-year fixed-rate mortgage. For some, an Adjustable Rate Mortgage (ARM) is a better loan product for their housing needs. Here are a few things to keep in mind for buyers considering using an ARM to finance their property.
Most ARMs today are actually “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. Hybrid ARMs have a lifespan of 30 years. These will have a fixed interest rate for a certain period (5, 7, or 10 years) and then will adjust every (1) year after for the years of the loan’s 30-year lifespan.
Buyers who use ARMs will start off with a lower rate
ARM rates start out lower than most 30-year fixed-rate loans and then gradually increase after the introductory period. In August 2018, ARM rates were particularly low for jumbo purchase scenarios in comparison to the standard 30-year fixed-rate option.
For example: let’s say a buyer with a 740 credit score purchases a single family home for $1 million and puts 20% down. Their rates for a 30-year fixed-rate $800,000 loan and hybrid ARM would be:
- 30-Year Fixed-Rate: 4.375%
- 10/1 ARM: 4.125%
- 7/1 ARM: 3.875%
- 5/1 ARM: 3.75%
ARM rates can change after the introductory period
Like we mentioned above, most ARMs have an introductory rate that is lower than the 30-year fixed-rate loan. These lower introductory rates can last anywhere from 10 years (the 10/1 ARM option) or for just a few months. This is all dependent on the type of ARM loan that buyers choose.
Once the introductory period is over, the buyer’s interest rate can increase or decrease depending on market trends. ARMs are “tied” to an Index. An index is a metric tool used to track market trends and determine the costs the buyer will be responsible for over the life of their loan.
A couple of popular indexes are 11th District of Funds Index (COFI) and London InterBank Offered Rates (LIBOR).
ARMs are great for buyers on the move
Buyers with shorter time-horizons should definitely consider using an ARM loan for their home purchase. Most buyers don’t keep their loans longer than seven years due to job changes, moves refinance, and other life changes.
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 should consider an ARM. Elderly buyers are also good candidates for ARMs. And lastly, buyers with enough cash reserves to simply pay off their mortgages or who plan to refinance soon after taking out their loan should also consider ARMs.
The best way to find out if an ARM loan is a right fit for a buyer is to talk to a reputable lender. At JVM Lending, our Mortgage Analysts are ARM experts and are happy to walk buyers through their loan options to find them the best fit. You can contact us here, or at (925) 855-4491 or [email protected].
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April 18, 2024
