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Buying a home is a big financial commitment. That means the mortgage you choose can have a big impact on how much interest you pay over time.
One option, a fixed-rate mortgage, is simple to understand: it offers the same interest rate throughout the term of the loan. Meanwhile, an adjustable-rate mortgage (ARM) is a little more complex.
Here’s what you need to know about ARMs.
As the name implies, ARMs have interest rates that adjust over time. Typically, the starting rate remains fixed for a set number of years, such as three, five, or even as much as 10 years. After that fixed period ends, the rate changes periodically, typically on an annual basis.
It’s important to realize that the first scheduled adjustment — after the initial fixed-rate period ends — could increase your monthly mortgage payments. You’ll want to plan for this date so you’re prepared to afford a potentially more expensive payment when the rate adjusts.
An ARM can be beneficial if the initial interest rate is lower than that of a fixed-rate mortgage. This means you’d pay less money during the early years of the loan.
ARMs can be a popular mortgage choice when interest rates are high. And if you only plan to stay in your home for a few years, they can be an option worth considering as long as you sell your home before the rate changes.
If you have a higher tolerance for rate variability in general, an ARM could also be a good choice for you.
Before deciding on an ARM for your mortgage, make sure you understand these key points:
Before you choose an adjustable-rate mortgage, take a hard look at your current budget and consider your potential for future income increases. Make sure you could comfortably afford your monthly mortgage payments if your interest rate was ever to reach the lifetime cap; otherwise, there could be major financial implications.
Also, consider how long you plan to live in the home. Is it a starter home or a forever home? Those buying a starter home might find an ARM more appealing since they won’t be in the house long enough to feel the effects of the adjustable-rate change.
Picking the right home mortgage is as important as choosing the right home. Our dedicated colleagues can help you find the right financing option for your unique situation. To learn more, visit us online or reach out to a Citizens Bank Loan Officer.
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