Ever feel like home buyers just can’t catch a break?
If you’ve waited to buy a home in Charlotte until the market cooled down a little bit, hoping for better home prices, you might be dismayed by rising mortgage interest rates.
But you don’t have to let that stop you from buying a home here! There’s a type of mortgage that might actually be perfect for this situation: the ARM loan.
What Is an ARM Loan?
ARM stands for Adjustable-Rate Mortgage. With an ARM loan, the interest rate on your home loan changes over time. Often, you can get an ARM with an introductory rate that’s much lower than the rates on typical fixed-rate mortgages. That gives you a chance to save money right off the bat.
As time goes by, the rate will change periodically. It might go up or down, depending on the rest of the economy. In a time of falling interest rates, your ARM interest rate will probably go down, too.
ARM Loans vs Fixed Mortgages
When choosing a mortgage, it helps to understand fixed-rate vs. ARM.
With a fixed-rate mortgage, one of the most common home loans offered by Charlotte mortgage lenders, your interest rate stays the same over the entire loan. Your monthly payment stays the same, too. If you get a 30-year, fixed-rate mortgage when interest rates are high, you’re locked into that high rate for the whole loan term — even if interest rates fall to record lows again, as they did in 2020 and 2021.
With an ARM loan, on the other hand, your mortgage rate resets periodically. If current market rates are low at that time, you could benefit with a lower mortgage rate on your ARM, too. If current market rates are higher, then the rate on your ARM will be higher when it resets. The reset period might be a year or more; it depends on the specifics of your loan.
For instance, you might see ARM loans written out as 7/1 ARM. That means your mortgage would have an initial fixed rate for seven years, then reset once per year after that. Your loan agreement will spell out what the rate will be based on and what the rate cap would be. Knowing that your rate will be fixed for the first seven years (or three, five, or ten, depending on your ARM loan) helps you plan your finances, too.
Are ARM Loans a Good Idea?
There are definitely times when ARM loans make more sense for a home buyer than a conventional fixed-rate mortgage.
And in an environment of rising interest rates, adjustable-rate mortgages are more popular now than they have been in years. In fact, more than 10% of new mortgages in the U.S. this year are ARM loans, according to the Mortgage Bankers Association.
ARM loans are a way to bring down the cost of home ownership by allowing you to secure a lower interest rate than you would be able to get with a fixed-rate mortgage. That’s because adjustable-rate mortgages are consistently offered at rates below fixed-rate mortgages – sometimes significantly below.
And unlike in the years before the Great Recession, when there were much fewer regulations in place regarding this type of mortgage, today’s ARM loans have interest rate caps that prevent rates from skyrocketing unexpectedly. These caps put a limit on how much your home loan’s interest rate can go up, even as market rates go up. With rate caps, buyers can be protected from wild swings in interest rates.
Who Can Benefit from an ARM Loan
Here in Charlotte, we are seeing an increase in home buyers looking for an affordable mortgage who could benefit from exploring ARM loans.
An adjustable-rate mortgage might be a good fit for you if:
- You are buying a starter home, not a “forever” home
- You can see yourself moving or upgrading your home within five to 10 years
- You are concerned about the monthly mortgage payments that go along with higher interest rate loans
- You are looking for an opportunity to get into a house near the top of your price range
- You are open to exploring all of your borrowing options
ARM loans could be a perfect fit for Charlotte homebuyers who are ready to buy but who don’t want to lock in today’s higher fixed rates. Buying a home with an ARM lets you sell or refinance later, but still get into your dream house today at a monthly payment you can afford.
Try our Mortgage Calculator to run some numbers yourself and see how much you might be able to save with an ARM. When you’re ready, our residential mortgage planners will help you run more detailed calculations and find the perfect mortgage to fit your needs.
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References:
https://www.freddiemac.com/pmms
