What Are Adjustable-Rate Mortgages?

by | Mar 4, 2020

Mortgages are not one-size-fits-all. The two largest categories of mortgages that most homebuyers choose between are fixed-rate mortgages and adjustable-rate mortgages. Each type has a unique set of benefits that suit a wide range of buyer situations. What is an adjustable-rate mortgage and why might a buyer opt for one over a fixed-rate mortgage?

 Adjustable-Rate Mortgages

The main difference between adjustable-rate mortgages (ARM) and fixed-rate mortgages is that ARM interest rates can fluidly change. When you sign a fixed-rate mortgage, you agree to pay the same interest rate and monthly payment for the entire span of the loan. The interest rate for an ARM changes with the market. This means that your monthly payment can increase or decrease depending on the current strength of the market.

Most ARMs come with an initial fixed interest rate of 5 years. This is called a 5/1 ARM. For this type of mortgage, the buyer is given a fixed interest rate during the first 5 years after the purchase. After that period, interest rates and monthly payments start to vary as the market strengthens or weakens. Most ARM adjustments are made year to year, but they can occur as often as every month.  

Strengths of Adjustable-Rate Mortgages

  • Low-interest rates initially: During the initial fixed interest period of ownership, interest rates are generally relatively low. This is a worthwhile option for buyers who do not plan on living in the home for a very long time.
  • Potential for low-interest rates: There is no way to guarantee the market will continue to strengthen. If it does, however, the low-interest rates that follow would allow those with adjustable-rate mortgages to continue to save money month to month.

Weaknesses of Adjustable-Rate Mortgages

  • Unstable payment: While you can attempt to predict the market, there is no guarantee that interest rates won’t rise, causing your monthly payments to rise with them.
  • Frequent ARM adjustments: Again, some adjustable-rate mortgages can change your interest rates from month to month. If this is too unpredictable for you to budget, a fixed-rate loan would likely be best for you.

Golden Lenders Can Help Find the Best Type of Loan for You

Golden Lenders helps home buyers in Colorado, Florida and California understand the different types of mortgages that are available and provides loans to help people achieve the dream of homeownership.  Since the specifics of which mortgage to choose is dependent on a variety of factors, we encourage you to call us for more information and find out which is right for you. Our number is (303) 482-2361, or you can send us a message.