Adjustable Rate Mortgage (ARM)
Is It Right for You?
An adjustable-rate mortgage (ARM), is a home loan that starts with a low fixed-interest rate for 3 to 10 years, followed by periodic rate adjustments.
Currently with the rising interest rate market, we have launched a very competitive 10/6 ARM product. As the initial low rate is fixed for 10 years, it offers a relief of repayment pressure on borrowers for a considerable period. For example, 10/6 Arm rate is generally 0.75 lower than conventional 30-year fixed rate which will save you thousands or tens of thousands over the years. For example, with a loan amount of 375,000, if the 30-year fixed interest rate is 6.0, the total monthly principal and interest is $2248. If you use the 10/6 adjustable interest rate of 5.25, the total monthly principal and interest for the 1st 10 years is $2071. It is a saving of $177 per month and a total of $21,240 over 10 years. (See rates assumption)
What are the pros and cons of ARM?
Adjustable-rate mortgages have a lower starting interest rate
Lower interest rates make a loan seem more attractive. After all, interest is the cost of borrowing. If you can keep this cost down, you won't have to send as much of your hard-earned money to the lender.
You may be able to qualify for an adjustable-rate loan more easily
Lenders consider your debt-to-income ratio when deciding on loan approval. That's your monthly payments relative to monthly income. When choosing ARM, with lower monthly payment, you may qualify for a larger loan size.
Your payments could decrease
If interest rates fall and drive down the index against which your ARM is benchmarked, your monthly payment could drop.
Adjustable-rate mortgages can be risky
The problem is, the ARM is adjustable. After the initial fixed period, If interest rates rise, your payments will increase after the adjustable period begins; some borrowers might have trouble making the larger payments.
Things don’t always go as planned
Is an ARM right for you?
Whether an ARM is a good choice depends on your goals and comfort level with unpredictability. If you sell the home or pay off the mortgage before the adjustable rate goes up, you'll save money. But an ARM probably isn't the right option if you plan to settle in for many years and want the certainty of a constant mortgage rate and monthly payment. In that case, a fixed-rate mortgage is the way to go.