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Everything You Need to Know About an Adjustable Rate Mortgage

Everything You Need to Know About an Adjustable Rate Mortgage

February 20, 2023 by X2 Mortgage

If you are looking for a mortgage product with an affordable introductory rate, you might want to apply for an adjustable rate mortgage (ARM).

At X2, adjustable rate mortgages are among our specialities. Read on to learn all about ARMs and how they work.

What are Adjustable Rate Mortgages?

When you take out a mortgage, there are two options for the format of your interest rate. It can either be adjustable or fixed.

If the interest rate is fixed, that means it remains the same for the entirety of the loan term. Even as market rates fluctuate, it does not go up or down.

If an interest rate is adjustable, on the other hand, the rate does fluctuate up and down with market rates. But for the first few years, you can enjoy an introductory period with a special low rate.

Types of Adjustable Rate Mortgages

There are multiple types of adjustable rate mortgages you can apply for.

  • Hybrid ARMs: When most borrowers think of adjustable rate mortgages, they are picturing a hybrid ARM. If you take out this type of loan, you pay the fixed, low introductory rate for the introductory period. After that, the rate becomes adjustable.
  • Interest Only ARMs: Interest Only mortgages are a specialized lending product that lets you avoid paying on the principal of your loan for the first few years. During that introductory period, you only pay on interest. After that, you begin paying off the principal.
  • Permanent-Option ARMs: This type of ARM is also sometimes called a “payment only” ARM. You get to decide with a permanent-option ARM if you want it to function like an interest only loan during the first few years or a regular hybrid ARM.

Benefits of Arizona Adjustable Rate Mortgages

  • Save money over the short-term. The top reason most people opt for an ARM is to make their mortgage less expensive in the initial years. You can maintain more liquidity in your finances this way, leaving funds available for other expenses.
  • Invest what you save. The money you save on interest during the first years after you move into your home can be put toward investment opportunities. Investing early can help you compound your money more over time, so there may be scenarios where this makes financial sense.
  • Save up for relocation. Lots of people who choose adjustable rate mortgages are going to be moving to new homes in the next few years. By paying a lower interest rate, they can save toward the costs of moving or the down payment on another home.
  • Rates sometimes decrease. Mortgage rates do not always rise with ARMs. They fluctuate in accordance with market rates, and sometimes market rates drop. If that happens while you are paying on an ARM, your rates could decrease.

Qualifying for an ARM in Arizona

When you apply for an ARM, we will assess:

  • Your credit score.
  • Your DTI ratio.
  • Your income.
  • Your employment history and status.
  • Your ability to make a down payment.

The exact requirements will depend on the particular type of adjustable rate mortgage you are applying for.

Is an Adjustable Rate Mortgage Right for You?

While adjustable rate mortgages have many benefits, they can also have drawbacks. If rates rise when you have an ARM, your interest rate will also increase. A fixed rate offers more in the way of stability.

For that reason, it is important to assess whether an ARM is the right fit for your needs. Here are some scenarios in which an adjustable rate mortgage may be a suitable fit:

  • You are moving again in a few years. Adjustable rate mortgages are usually most appropriate for homebuyers who plan to only live in their home for several years. If you move out in just a few years, you can save money on the low introductory interest rate, and even put it toward relocation costs, without worrying about rates increasing in the future.
  • When you want to keep your finances fluid in the short term. If you are on a tight budget, it might be worth it to you to keep your finances as flexible as you can over the next several years. Perhaps you expect to earn more money in a few years, so you are less concerned about interest rates potentially rising later.
  • When you want to pursue other goals. With the money you are saving on interest now, you may be able to invest more toward pursuing other financial goals.

Apply Now for an Adjustable Rate Mortgage in Chandler or Beyond

If you need help figuring out whether to choose an adjustable or fixed interest rate, our knowledgeable team is standing by. Please call us today at (480) 992-4200 to schedule your consultation. You can tell us about your financial scenario, and we can offer you personalized advice. We serve homebuyers and homeowners in Chandler and throughout Arizona.

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