Whether it’s the current housing market or other expenses you’re planning for, it is easy to find reasons to put off big financial decisions when thinking about buying a home.
But having more information can help alleviate uncertainty. Rui Chaves, Vice President and Regional Sales Manager at Rockland Trust, has seen housing market fluctuations throughout his career and understands what it takes to find his clients the best home options.
In fact, one potentially beneficial opportunity many buyers often overlook as they begin their home-buying journey is an adjustable-rate mortgage (ARM).
Adjustable rate mortgages (ARMs) have a variable interest rate after an agreed-upon initial time frame has passed. This timeframe can range from three to 10 years.
ARM loans get their names from how long the interest rate remains fixed and how often the interest rate is subject to change. In a 7/1 ARM, for example, the seven stands for an initial seven-year period during which the interest rate remains fixed. The one shows that the interest rate is subject to change once every year after that.
The period in which the initial interest rate is fixed and the rate at which it is subject to change can vary depending on the terms you agree upon with your lender.
ARMs have somewhat of a bad reputation. Borrowers may associate ARMs with the housing bubble and 2008 financial crisis. However, today, ARMs are much different than they were back then. There are several benefits to exploring an ARM.
Because the interest rate you lock in can be significantly lower than that of a traditional 30-year loan, it allows you to benefit from a lower mortgage payment during that fixed time frame.
Savings will vary, but it could range anywhere from $200 to $300 per month on a $400,000 mortgage.
ARMs can also be an excellent option for those who have future plans to relocate or understand that they may outgrow the home they are purchasing before the end of the introductory fixed-rate period.
It’s important to work with the right lender that will help you align the right product(s) with your needs. Some of the ARM products from the early 2000s included short-term fixed time frames, interest-only features, and prepayment penalty terms that, in some cases, caused negative amortization. This leads to a principal balance increase since the minimum mortgage payment isn’t enough to cover the accrued interest.
But interest rates are no longer the only factor in setting up loan terms. Consumers now have multiple ARMs to choose from. Three, five, seven, and 10-year fixed periods offer lower interest rates than the traditional 30-year, fixed-rate mortgage.
Another significant aspect of the lower buy-in rate is the caps set in place. Even if interest rates increase, you are not stuck paying off a debt you cannot afford.
Chaves explained that at Rockland Trust, ARMs are set up, so the adjustment period is every year. Some products will adjust rates every six months, and often, the first adjustment is capped at 2% above the initial note rate. Worth noting is that the lifetime change is capped at 6% above the starting rate, so you will be protected even if interest continues to increase for the foreseeable future.
Some buyers may consider refinancing their ARM back into a traditional 30-year fixed mortgage before the ARM fixed-rate time frame expires. Rui shared this is especially true in a market where most analysts are forecasting rates to stabilize and start coming back down by the middle or the end of next year.
No one can quite predict the exact timing of when the refinancing market will cycle back to normal rates. Because there is that element of risk, buyers and their lenders may want to consider the 5-year or the 7-year ARM.
The bottom line is that your financial situation is unique and something to consider before making big decisions that can impact your quality of life.
It is essential to do your research and explore all your options before buying a home to ensure you are getting the best value for your money. Having a trusted team behind you will allow you to make more informed decisions and be more confident about them.
“We recommend talking to your attorney, real estate agent, and other loan officers to equip yourself to make an informed decision,” Chaves said.
Genuine connections and trust are crucial in believing an individual has your best interest in mind. This is especially true when making big financial decisions impacting your future.
Look around to find the best rates that meet your financial needs. Finding a qualified loan officer is the easy part. Finding someone that understands you and your financial goals can be challenging. Take your time when searching for your match, and ask all the questions you may have. A suitable loan officer will be able to help you and take your concerns seriously.
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