4 Reasons ARMs Are Usually Better Than Fixed-Rate Mortgages

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  • The introductory interest rate on an ARM is lower than the interest rate on a comparable fixed-rate mortgage.
  • Because of its lower initial monthly payments, ARMs may be easier to qualify for and you may be able to qualify for a bigger home loan.
  • ARMs may be best for those who plan to sell their house before the end of the introductory rate term or plan to refinance in a few years.

Here is when you should use an ARM.

In the world of mortgages, there are two main types of interest rates: fixed and adjustable. A fixed-rate mortgage maintains the same interest rate for the life of the loan, while an adjustable-rate mortgage (ARM) has an interest rate that can change over time. You will typically get a lower introductory rate for a time period ranging from three to 10 years, and then the rate will change each year based on the prevailing interest rates. While both have their advantages, ARMs may be better than fixed-rate mortgages for a few reasons.

1. ARMs have lower introductory interest rates

The initial interest rate on an ARM is usually lower than the interest rate on a comparable fixed-rate mortgage. This is because with an ARM, the borrower takes on more risk since the interest rate could potentially go up in the future. As a result, borrowers get a lower rate when they first take out the loan.

With mortgage rates more than doubling since the beginning of the year, ARMs have become more popular as people look to save on interest and hope that interest rates will go down as inflation decreases. The interest rates for ARMs are typically 0.5% to 1.5% lower than for a conventional 30-year mortgage. For a $500,000 home, this can be a savings of $500 a month.

2. ARMS are easier to qualify for

In general, it's easier to qualify for an ARM than for a fixed-rate mortgage. This is because the interest rate is lower and, as a result, so is the monthly payment. However, lenders will take into account the fact that the interest rate on an ARM can go up in the future when determining whether or not you qualify for the loan.

3. ARMS can help you obtain a bigger loan

Since ARMs typically have lower interest rates than fixed-rate loans do, they result in lower monthly payments. This can help you qualify for a bigger loan amount since lenders will factor in your other monthly debt payments when determining how much they're willing to lend you.

4. ARMs allow you to take advantage of lower interest rates

Interest rates have gone up 3% so far this year, which has been the biggest increase in 40 years. If you get an ARM now and interest rates go down in the future, you could take advantage of the lower interest rates without having to refinance. By avoiding a refinance, you won't have to pay any closing costs and fees, and your interest rate and monthly payment may drop without you having to do anything at all. However, if interest rates go up, your payments will be higher. So it is important to understand the risks of an ARM before you decide to get one.

Who are ARMs good for?

While ARMs are suitable for a wide range of borrowers, they may be especially good for:

  • Home buyers who plan to sell their house before the end of the introductory rate term
  • Home buyers who want to keep their monthly payments low during the early years of homeownership
  • Borrowers who want to qualify for a bigger loan
  • Borrower who plan to refinance their loan after a few years

Do your research

ARMs usually have lower initial payments, but those can rise after the initial rate period ends. During the 2008 financial crisis, many homeowners saw their interest rates rise and were unable to afford the new monthly payments. Fixed-rate loans are typically more expensive upfront, but are more predictable in that your payments don't change.

An ARM might be worth it if you'll sell the home or pay off the mortgage in 10 years or less. But a fixed-rate mortgage would probably work better if this will be your forever home and you want the certainty of a stable interest rate and monthly payment.

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