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Interested in an Adjustable-Rate Mortgage? Here's What You Need to Know

What is an adjustable-rate mortgage (commonly called an "ARM")—and why might a homebuyer choose to get one?
Mortgage rates have risen dramatically in 2022. Some homebuyers are turning to adjustable-rate loans to keep monthly costs down. Adjustable-rate mortgages often have a lower interest rate for a period of time. However, like the name implies, ARM loans are adjustable—the rate can change! So, it's important to understand how they work before you decide if this product is right for you. In this blog post, we will discuss the basics of ARM products, and why borrowers might choose them.

What is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate changes periodically, usually based on an index. This means that your monthly payment can also change – sometimes dramatically. ARM products are available in a variety of terms, and with different types of indexes. The most common indexes used with ARMs are the LIBOR, COFI, and CMT (Constant Maturity Treasury) rates.

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How does your ARM loan index work?

The interest rate on an ARM loan is based on the index (LIBOR, COFI, CMT, etc) plus a margin. The margin is a set percentage rate that does not change. For example, if the LIBOR index is at 0.75% and your mortgage margin is 300 basis points (or three percent), then your interest rate would be three percent. Most ARMs have periodic and lifetime interest rate caps. A periodic interest rate cap limits how much your interest rate can adjust at each adjustment period. A lifetime interest rate cap limits the highest your interest rate can be during the life of the loan, no matter how high rates go.

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The most common terms for ARMs are three, five, and seven years. You will also see ARMs with terms of one, two, three, or ten years. The most common type of ARM is the hybrid ARM. Hybrid ARMs have a fixed interest rate for a period of time (usually three to seven years), and then they adjust annually. Another type of ARM is the interest-only loan. With an interest-only loan, you only pay the interest on the loan for a certain period of time (usually five to ten years). After that, you begin paying both principal and interest.

Why choose an adjustable-rate mortgage?

There are several reasons why borrowers might choose an ARM. The most common reason is to get a lower interest rate. If you think rates will go down, or if you only plan to stay in your home for a few years, an ARM might be a good choice. Just remember that your interest rate can (and probably will) adjust upwards in the future, so make sure you can afford the payments before you choose an ARM.

If you are interested in an adjustable-rate mortgage, make sure to do your research and understand how they work. Be sure to speak with a loan officer to see if an ARM is right for you.

If you need a recommendation for a trusted lender, or if you have another question about buying or selling a home in Northern Virginia, please do not hesitate to reach out. As the top Loudoun County real estate team, we’ve built a robust network of vetted, experienced industry pros with whom we’d love to connect you. Talk soon!

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Following these steps, you can increase the value of your property ahead of a home sale, without breaking the bank. Why not start making improvements today! Your home will thank you for it. In the meantime, if you are thinking about selling your home or have any questions, please don’t hesitate to contact us. We’re always happy to hear from you.

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