Adjustable rate mortgages (ARMs) are in their essence, mortgage loans with variable rates. Whether you are a first-time home-buyer or someone looking to purchase a second home, here are four big reasons why you should consider Adjustable Rate Mortgages (ARM). It could very well save you thousands down the road.
#1: Lower rates help you build equity faster
Who doesn’t love a good discount? We certainly do! The beauty of ARMs is that they are offered at a much lower rate than a traditional fixed-rate mortgage for the first 3, 5 or 7 years, helping you build that sweet home equity a lot faster.
For example, a fixed-rate 30-year mortgage rate starts at 4.625%, whereas a 5/1 30-year ARM rate starts at 3.75% (for the first five years). If you were to take out a $300,000 loan, a fixed-rate would cost you $1,542.42 per month while the ARM would cost you $1,389.35 per month, saving you a total of $9,184 in the first five years. You can use our ARM analyzer calculator to crunch the numbers for your monthly payments.
The flexibility is the key here. You could make payments as if it were a fixed-rate mortgage and be closer to paying off your mortgage, or you could put the extra savings towards your emergency fund or any other savings goals you might have.
#2: Rates can go down, lowering your monthly payment significantly
Arguably, the best scenario that can happen for a home buyer who chooses an ARM is that the rates can actually decline. Since your rates are adjustable, if the market rates so happen to go down, you’d be in a position with a huge savings advantage. Of course, the market rates can potentially go up, too, so be aware of the risks.
Taking the previous example: on top of already saving $9,184 in the initial 5-year period, if the market rate for mortgages drops to 3.50% (from 3.75%) during your first variable period, you’d save yourself an additional $1,432 that year alone. If it continues to drop further for the second year when your rates adjust, get ready to toast your financial victory.
#3: You don’t expect to live in your home for more than 30 years
The great thing about ARMs are that for the first few years of homeownership, your monthly payments are at a discounted rate. If you don’t plan to live in your home for more than the 30-year term of the mortgage contract, an ARM would be the most cost effective method of financing.
At DECU, we offer 3/1, 5/1 or 7/1 ARMS, so that’s plenty of time for you to look for and upgrade to your dream home, while saving a lot of money!
#4: Rate and payment caps can limit your responsibility
Most ARM loans come with an interest rate cap structure in the form expressed as: 2/1/5. Meaning there is a 2% initial cap, a 1% periodic cap, and a 5% lifetime cap. Using the proposed cap structure, if you’ve locked in your 5/1 ARM rate at 3.75%, after the initial five-year period, your new adjusted interest rate cannot be higher 5.75%, at every subsequent change date the rate can only change at a maximum of 1%, and the maximum interest rate that can be levied onto you for the lifetime of the loan would be capped at 8.75%.
The bottom line is that ARMs can have pretty significant savings if you’re aware of the contract terms and the responsibilities you have after a certain period of time. If you’re willing to take the chance, the savings that you could get is unparalleled when compared to other mortgage options. Since everyone has a unique situation, we highly encourage you to speak with our mortgage advisors to see if an ARM is the best fit for you.
This article has been provided for educational purposes only and is not intended to replace the advice of a loan representative or financial advisor. Deere Employees Credit Union does not provide tax advice. The examples provided within the article are for example only and may not apply to your situation. Since every situation is different, we recommend speaking to a loan representative or financial advisor regarding your specific needs. You may also want to contact your tax advisor for additional tax information.