Are Adjustable-Rate Mortgages Making a Comeback? 

Home buyers have had a rough time lately.  First, the frenzied housing market stymied so many offers and caused frustration due to lake of inventory.  Now that the pace and prices are starting to drop, interest rates have ticked up to alarming levels.  While some buyers are postponing their purchase, those still in the market are starting to consider more creative financing, including an ARM (Adjustable-Rate Mortgage).  

What is an ARM?

Unlike a 30-year fixed mortgage, as the name suggest, the interest rate of an ARM can change over the course of the loan.  The interest rate is based on an index, such as the one year T-Bill.  Additionally, the timing of adjustment is fixed in the loan documents, so the borrower knows hot to plan for the changes.  For example, a 5/1 ARM means that the initial interest rate is fixed for the first five years and then can adjust once a year for the remaining 25.  Likewise, a 7/1 ARM has a fixed period of 7 years.  There are also built-in protections to ensure that the adjustments are reasonable.  These are limits to how high and adjustments (or reductions) can be assessed at each point and an overall cap on the interest rate. 

The advantage of an ARM is to allow more buying power to buyers by starting with a lower interest rate than that available in a 30-year fixed loan.  This can be especially valuable for buyers who do not intend to keep the home for 30 years; they can tailor the adjustments based on their planned time to own the home. 

The housing market is shifting.  Homebuyers may not have the same challenges as last year, but today's market presents new issues.  One tool is an Adjustable-Rate Mortgage, and with the higher interest rates, this mortgage product may be making a comeback.  

Certainly, we are not advising prospective or currently clients to obtain any type of loan.  However, you can work with your mortgage professional to choose the loan product that is right for your needs.  If you do not have one, please reach out to us and we can connect you with a reputable local lender who can help you navigate the changing lending market.  The best place to start any home (or land) buying journey is to talk to a lender and see how much purchasing power you have within your budget.  This is powerful information and, when making offers, it puts you in a stronger position and increases your chances of getting the house of your chose.  

If you have any questions, or would like referrals for local professionals, please don't hesitate to reach out to one of our agents.  We do not get referral fees, but we do like connecting great companies with good clients.  

Happy Holidays!