Is an Adjustable Rate Mortgage a Good Idea in 2022?
As rates have risen well above the predicted levels for this year some homebuyers are considering using an adjustable-rate mortgage to obtain a lower interest rate. The number of adjustable-rate mortgage loans, or ARM loans, increased from 3% of all new mortgages at the beginning of January to about 11% of all new mortgages in May. This increase in the number of new ARM loans has not been seen since 2008 according to information from Mortgage Bankers Association.
The reason homebuyers are considering these loans is the significant difference in monthly payment amount when the interest rate is lower. But repayment terms can change with time and this is the adjustable part of the name. The mortgage interest rate has the potential to increase after a very short period of a fixed-rate at the beginning of the loan. This could mean loan payments could be much higher than they would be if a home buyer chose a fixed-rate mortgage.
Here are some things to consider with an adjustable-rate mortgage in 2022
The most common type of adjustable-rate mortgage is called a hybrid ARM. This loan begins with a fixed-rate term. Once this period is over the mortgage interest rate can be adjusted to the current average rate. This can be a good option for borrowers that hope to sell within that time. Or plan to refinance the property before the adjustable period comes into play.
Common attributes of adjustable-rate mortgages
Interest rate and payments are fixed for the first few years
Mostly adjustable-rate mortgages offer an initial fixed-rate term of five years. Though there are adjustable-rate mortgages that offer a fixed rate for seven or 10 years. This means that a lender has to stick with the original mortgage interest rate offered until this time is up. After this, they are within their rights to adjust the mortgage interest rate however they choose.
Interest rate and monthly payment can change periodically
The other adjustment is specified by the number after the/in your loan. For example, if you have a 5/1 ARM this means that you will have five years of a fixed rate at the beginning and then every year your interest rate will be reassessed. Most often interest rates are reassessed yearly with ARMs but this can change to a different term. Some ARMs offer only six months.
The amount of interest rate change can be capped
Having a periodic adjustment cap limits the amount your rate can increase in a single adjustment period. If a loan has a lifetime cap this can specify how much the interest rate is able to increase with each adjustment period for the entire life of the loan.
Monthly payments can be capped
Some adjustable-rate mortgages offer a payment cap meaning that it protects the monthly mortgage payment from increasing past a certain dollar amount. Using the most common example, a payment cap of 6%, if you have a $1500 a month payment this means that the new adjusting payment cannot be above $1590 at a point of adjustment.
Current adjustable-rate mortgages compared to current fixed-rate mortgages
It is not brand-new news that mortgage rates right now are significantly higher than they were just a few months ago. This applies to all mortgage loan products across the board. Today the average 30-year fixed-rate mortgage is around 5.81%. This is up 3% from the beginning of 2022.
Right now, the average rate for a 5/1 ARM loan is about 4.41% as of late June 2022. This is a significantly lower interest percentage as compared to a fixed-rate mortgage but it is always best to remember that this number will very likely increase after the initial fixed payment period.
Finding out if going with a lower interest rate and using an adjustable-rate mortgage is best, it is always good to ask the advice of trusted real estate professionals and mortgage professionals.
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