Interest rates on the popular 30-year fixed rate mortgage are at their highest since October 2014, but there are other mortgage options that still offer lower rates, including adjustable rate mortgages (ARMs).
Could an adjustable rate mortgage be right for you?
Many borrowers are still afraid of adjustable rate mortgages because of the stories that surrounded ARMs during the last housing crash. Consequently, predictable fixed-rate mortgages have become the go-to mortgage option for many borrowers. However, the terms that allowed those high-risk incentives are not allowed under current mortgage regulations.
Today, borrowers have the option of ARM’s that combine principal and interest payments or non-conforming interest-only ARM’s. Depending on the ARM product you select, your rate will be fixed for a period of up to 10 years. Industry statistics state that 90% of homeowners don’t stay in the same mortgage for nine years. ARMs are therefore an attractive option for many first-time homebuyers, who can buy a smaller starter home on a lower rate with the hope of moving into a family-sized home in about five years, before the mortgage adjusts to a different interest rate.
How does an ARM really work anyhow?
The initial rate and payment amount on an ARM will remain for a fixed period. The period between rate changes is called the adjustment period.
In a 5/1 Hybrid ARM for example, the interest rate is fixed for the first 5 years, and the rate then adjusts annually (the 1 in 5/1) until the loan is paid off or refinanced. Starkey Mortgage offers a 3/1 ARM, 5/1 ARM, 7/1 ARM and 10/1 ARM. Interest rates vary between each of the options, with interest rates increasing slightly for the longer terms.
How to qualify for an adjustable rate mortgage?
It's generally not any more difficult for a borrower to qualify for an ARM than a fixed rate mortgage. Similar to other home loan options, ARM qualification is determined by the borrower’s credit score, debt-to-income (DTI) ratio and the loan-to-value (LTV) ratio of the home loan.
The underwriting is similar to that of a 30-year fixed loan. Lenders will look not only at whether the borrower can pay the fixed rate over the entire term of the loan, but also how much that rate could increase after the fixed period, and if the borrower can afford that, too. The lender is required to show the borrower exactly what all payments will be.
As many cities with low inventory are seeing housing prices creep higher (like the Charleston area) and interest rates on 30-year fixed rate home loans are predicted to rise in 2017, an ARM could offer home buyers the opportunity to enter their housing market.