Adjustable Rate Mortgages Seeing A Resurgence In Interest
Updated: Mar 28
Adjustable Rate Mortgages (ARMs) are making a comeback. But before you jump into one because of the lower rate, we want to help you understand what they are and discuss the pros and cons of an ARM compared to a fixed rate mortgage.
Prior to summer of 2022, mortgage rates had held at near historic lows for more than a decade.
In fact data shows that the last time the national average for a 30-year fixed rate mortgage ticked above 5% was in April of 2010. Mortgage rates have been so low for so long, that buyers started to balk at rising costs and thus many delayed purchasing a home in the second half of 2022.
When rates are rising, lenders look for ways to help homebuyers stay in "the game". One of those ways is creating options that help borrowers secure a lower rate, even if it's temporary. With that in mind, banks have been reintroducing Adjustable Rate Mortgages (i.e. ARMs) back to the market and buyers have been biting.
According to Laura Petrecca of Kiplinger's Personal Finance, "In October , ARMs accounted for more than 13% of mortgage applications, the highest share since 2008."
With so many people rushing into an Adjustable Rate Mortgage, we wanted to remind people of the possible advantages and disadvantages of using an ARM to finance your home purchase.
In this video, our lead agent, Mike Schoonover, walks through a recent Kiplinger's Personal Finance article by Laura Petrecca which covers some of the key components of an ARM and discusses their pros and cons, take a look:
Southern Indiana mortgage expert, Brad Sea of Kentuckiana Mortgage Group told us "The most important thing with Adjustable Rate Mortgages is knowing exactly what you're getting into; understanding the terms, the initial rate, how often it can change, and by how much it can change. If you don't understand these terms you are potentially asking for trouble down the road."
To be fair, choosing an ARM can be beneficial for those who only plan to move or refinance prior to the end of the fixed rate period. This could allow a borrower to capture a lower monthly payment and interest expense while rates are higher for other buyers. But it is critical to remember that you are getting the discounted rate in part because you are choosing to take on the interest rate risk that the lender would normally assume.
If you are risk adverse or need the reliability of a fixed payment, then a fixed rate mortgage is probably better for you.
We asked Brad Sea how people can determine which option is best for them and he responded "There are a lot of different factors to consider, but with a brief phone call I can help potential borrowers understand the terms of each option and help them decide which loan type would work best for their individual needs."
Want to find out more about Adjustable Rate Mortgages and if one is right for you? Reach out to us at 812Living@gmail.com or connect directly with Brad Sea and Kentuckiana Mortgage Group at https://www.kyinmortgage.com/brad-sea
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