Is It Time to Consider an Adjustable Rate Mortgage?
Uncertainty over when interest rates will fall has created greater interest in other mortgage options that offer lower rates, including adjustable rate mortgages (ARMs).
Could an adjustable rate mortgage be right for you?
Predictable fixed-rate mortgages have become the go-to mortgage option for many borrowers. But today’s borrowers has options. An adjustable rate mortgage combines principal and interest payments or non-conforming interest-only ARM’s. Depending on the ARM product, the rate will be fixed for a period of up to 10 years. ARMs are therefore an attractive option for many first-time homebuyers. With home prices increasing, an ARM can assist in buying a primary residence at today’s rate while also building equity.
How does an ARM work?
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. Certainty 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.
Contact a Certainty mortgage professional in your state to see if an adjustable rate mortgage makes financial sense to you.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
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