Should You Opt for an ARM Mortgage on a Columbus Home?
As a strategy for saving money on a Columbus home purchase, many potential Columbus homebuyers have looked at the possibility of taking out an adjustable-rate mortgage to help save some money on the continued higher interest rates than traditional mortgages are offering currently. The number of adjustable-rate mortgages taken out across the country has significantly risen as mortgage rates are higher than many buyers would hope.
The allure of an adjustable-rate mortgage is that they most often come with a much lower beginning interest rate and monthly payment as compared to traditional fixed-rate mortgages. However, they can be a risk with time as the initial fixed rate adjusts to a new rate. Some home buyers are taking advantage of the lower interest rates offered with adjustable rate mortgages with a strategy of refinancing later on. But is an adjustable rate mortgage right for your Columbus home purchase?
How an adjustable rate mortgage works
There are many different types of adjustable rate mortgages but the most common offered is what is called a hybrid ARM. This means that the mortgage has a fixed rate. At the very beginning and then moves to an adjustable interest rate after a locked-in period of time. The most widely offered hybrid ARM is the 5/1. This means that for the first five years of the mortgage after signing paperwork the terms are locked in at the interest rate agreed-upon for those five years. Then after every year, the terms will be reevaluated and adjusted. There are other time frames including 10 years and seven years but the most common is five years.
After the first initial fixed period, the adjustable rate can vary as well but the most standard adjustment rate is once per year. There are some adjustable rate mortgages that will adjust every six months. Some adjustable rate mortgages have a periodic adjustment cap that will limit the amount the interest rate can increase with each adjustment period. Some adjustable-rate mortgages have a lifetime cap which puts a limit on the amount an interest rate can increase over the entire life of the loan. There are also some adjustable rate mortgage programs that have monthly payment caps as well. This means that the new adjustable rate can not require a higher monthly payment than the Increase for a current monthly payment on the loan.
Is it a good idea for a Columbus home buyer to consider an ARM mortgage in 2023?
With a large increase of home buyers opting for adjustable rate mortgages, you might be wondering if it is a good idea for you personally. There are many things to consider within your personal homebuying parameters and financial parameters before taking on an adjustable-rate mortgage. The most important is to ask yourself where you may see yourself at the end of your adjustable rate term and where mortgage rates are expected to head at the end of that term as well.
The big risk with an adjustable-rate mortgage is that there is no way of perfectly projecting what will happen with mortgage rates. If there's anything we have learned about the housing market in the last few years it quite possibly could be just that.
The adjustable mortgage could be a good option for a home buyer who does not see themselves living within a home longer than the first locked-in rate period of the mortgage. It could also be a great way to get into a home when a home buyer knows that they will be able to expect a substantial income boost in the next few years while the first initial period of their loan is set in stone to help them prepare for a refinance to a more traditional fixed rate loan.
No matter your personal financial plan and strategy is always best to talk over your thoughts with a trustworthy financial advisor. They can help you to better understand exactly how an adjustable mortgage available to you will work and if it looks promising for your personal financial situation.
What are current ARM mortgage rates?
The average rate for a 5/1 ARM which is the most common type of ARM saw an increase to just over 6%. But this is still lower than the average 30-year fixed rate mortgage interest rate which is hovering around 7% as of August 2023. This in some scenarios could save a potential homebuyer a significant amount of money on their monthly payments when taking out the loan right at a home purchase. But you do always want to remember that the rate could quickly adjust to the average conventional loan mortgage rate. So if a homeowner with a 5/1 ARM was coming to the end of their five-year term on their adjustable rate they could be facing an increase of one whole percentage point. There is no guarantee of where your lender will choose to adjust your interest rate once your locked rate becomes adjustable.
If you are interested in purchasing a Columbus home and are curious about your ability to afford a home please contact me. I am here to talk about your Columbus homebuying options to help you discover if purchasing the home you are searching for is within your reach. I make it my duty to help my clients understand the home-buying process and keep it as stress-free as possible to help them find a Columbus home they love.