The term Adjustable-Rate Mortgages (ARMs) may carry a sense of apprehension for potential homebuyers. However, ARMs are some of the best loan products in today’s current environment, specifically for Jumbo Loans (defined as a loan greater than $684,250 throughout most of the United States).
What is an Adjustable-Rate Mortgage?
An ARM is a loan product with a fixed rate for the first “X” years of the mortgage and adjusts periodically throughout the remainder of the loan term. Typical ARM lengths range from 3, 5, 7, or 10 years with a 6-month adjustment period throughout the duration of the term dependent on the current market rates. Many borrowers avoid ARMs due to the uncertainty of future cash flow when the fixed period terminates. That said, in today’s residential lending environment risk is mitigated given the future opportunity to refinance before the fixed-rate portion of the loan expires.
Economic Trends
Many economists and financial analysts believe we are experiencing a pattern today that has been experienced several times throughout the past 50 years. Interest rates have risen significantly and quickly, in large part due to increasing inflation. As such, the Federal Reserve has begun to increase the Fed Funds Rate and forecasts similar activity throughout the remainder of 2022 to help curb inflation. Historically, this results in slowing down the economy and leads to a recession. History has a way of repeating itself, and EVERY SINGLE TIME the United States has entered a recession in the past 50 years, interest rates have come back down.
ARM Advantages
Adjustable Rate Mortgages are typically more favorable in the initial fixed period compared to other loan products. In other words, a consumer can obtain a significantly lower rate for a few years with no extra money out of pocket, knowing there’s the option to refinance as the initial portion of the loan approaches maturity. At this time, another ARM product or a fixed-rate mortgage may be more attractive.
Summary
It’s important to consult an experienced loan professional well-versed in all lending opportunities in order to build home ownership wealth. Exploring a variety of loan products before deciding will ensure success in achieving both short and long term financial goals.
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