3 Benefits of Adjustable-Rate Mortgages

Adjustable-Rate Mortgage (ARM) loans offer lower interest rates during the earlier term of the loan with a rate that is fixed for a set amount of time and then is adjusted thereafter according to the market. For example, a 7/1 ARM loan will have a fixed rate for the first seven years and will adjust each year thereafter. This type of loan has historically been considered less desirable than a long-term fixed rate loan.

One reason borrowers might avoid an ARM loan is because they might feel uncomfortable with the unknown interest rate that follows the fixed rate period. Additionally, ARM loans historically have had a bad reputation because they were considered a subprime loan. Subprime refers to the below-average credit score of the individual taking out the mortgage, indicating that they borrower could be a credit risk. However, ARM loans are no longer considered subprime, and can benefit many borrowers!

3 Benefits of Adjustable-Rate Mortgages

1. Lower interest rates– The interest rate of the first period of an ARM loan is typically lower than the rate of a 20 or 30 year fixed-rate loan. That means the monthly payments during the first years of an ARM loan are likely lower than the monthly payment of a fixed-rate mortgage during the same time.
2. The ARMs fixed period typically aligns with the typical lifespan of a mortgage – WESTconsin Vice President of Mortgage Loans and Services, Kyle Zimmer, says “most borrowers don’t actually have a mortgage loan for more than seven years.” He continues, “whether it be due to moving or refinancing, many mortgages don’t last anywhere near the 20- or 30-year mark that fixed-rate mortgages are often contracted for. So, depending on their situation, borrowers could benefit from the lower interest, fixed rate period of ARMs.”
3. Adjustment caps are in place to protect borrowers - After the first period of the loan, the interest rate that affects your monthly payments could move higher or lower, depending on the state of the economy and the general cost of borrowing. However, borrowers are protected with an ARM because they have caps that limit how much the interest rate and/or payments can rise per year or over the lifetime of the loan.

For more information on ARMs loans, please contact a WESTconsin Loan Originator. Or, to compare payments of ARMs versus fixed rate loans, use our payment calculator.