3 pros and cons of adjustable-rate mortgages
Let’s talk about adjustable-rate mortgages. Yes, it’s likely that if mortgage rates decrease (at least that’s the hope) this year, such a topic may not garner as much attention as it has lately. However, it’s always good for us in the title and real estate industry to know what options our potential buyers have when it comes to financing their home purchase.
In recent years – especially as rates have spiked – this option, known commonly as an ARM, emerged from the shadows of the 2008 housing crash and became a viable option for many prospective homebuyers. But like any important financial decision you consider, choosing an adjustable-rate mortgage comes with its advantages and disadvantages. Come and take a closer look at some of the main pros and cons of ARMs based on this article from Nerdwallet to learn more.
Pros of Adjustable-Rate Mortgages
Lower initial interest rates. The article mentions that the most attractive feature of ARMs is their lower initial interest rates compared to fixed-rate mortgages, which can lead to significant savings in the early years of the mortgage. This ultimately makes an ARM a tempting option for buyers trying to minimize their upfront costs.
Potential short-term savings. If a potential homebuyer is planning on a short stay in their home or anticipate refinancing in the future, an ARM can be financially beneficial. The initial lower payments (which can be for years) can free up funds for other investments or expenses.
Flexibility. ARMs offer a degree of flexibility that can be appealing to homebuyers, such as having the flexibility to choose between five-, seven-, and ten-year ARMs. Also, if market rates go down, you could end up paying less without the need to refinance, unlike with a traditional fixed-rate mortgage.
Cons of Adjustable-Rate Mortgages
Rate and other uncertainty: The unpredictability of future interest rate adjustments is a significant downside to ARMs. If the rates increase, then so do your monthly payments. As the last couple of years have shown, these fluctuations can be drastic and unpredictable.
Complexity: ARMs tend to be more complex than fixed-rate mortgages, and understanding the terms, caps, margins and indexes that dictate rate adjustments can be challenging. This complexity adds a layer of risk to the equation, as many homeowners discovered during the 2008 crisis when they faced soaring payments they couldn’t afford. Safeguards have been put in place since then, but it’s still key to ensure all terms and possibilities are understood before choosing this route.
Long-term risks: An ARM can be riskier for long-term homeowners due to the potential of rising interest rates over time. If they plan on staying in their home for many years, the initial savings may not offset higher payments later.
Is an ARM the right option?
While adjustable-rate mortgages offer attractive lower initial rates and potential short-term savings, they come with their own set of risks and uncertainties. However, for the right property and situation, an ARM could be one of a prospective buyer’s best options. As the article above mentions, this type of mortgage can benefit those:
- Who are planning to move again relatively soon.
- Who can and want to pay off their mortgage quickly – often before the introductory rate ends.
- Who want lower payments to start their home journey and are comfortable with those payments being a lot more in the future.
As with any significant financial decision, it’s wise to make sure your potential buyers consult with a financial advisor and then a loan officer to determine whether an ARM aligns with their long-term money and home goals. This type of mortgage is just one of many they have at their disposal, so knowing the options is important. No matter how your customers get to their next home, our teams would love to be the title and closing experts to guide them along the way.