Is An Adjustable-Rate Mortgage Right For You?

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Mortgage rates have climbed higher and higher, nearly doubling what they were at the start of 2022. The average 30-year fixed-rate mortgage has been hovering above six percent creating a challenge for potential homebuyers to afford what they want. Homebuyers and investors have been turning to adjustable-rate mortgages (ARMs) to reduce their monthly payments for better affordability and yields.

What is an ARM?

An adjustable-rate mortgage is a type of home loan with an interest rate that adjusts based on the market. Typically, ARM loans offer an introductory rate that is lower than the available rates for a fixed mortgage. This initial introductory period can range from 3, 5, 7, or up to 10 years. Due to the reduced payments made during the introductory period, ARM loans are more attractive to buyers who are looking while interest rates are high. After the introductory period ends, the loan’s rate will reflect current mortgage rates. Throughout the lifetime of an ARM loan, monthly payments will likely vary year to year. An ARM loan could be a viable option for many seeking homeownership in 2023.

Who Opts for an ARM Loan?

ARM loans typically attract buyers who are comfortable with some risk and are finically savvy. The attractive lower rate is guaranteed for the duration of the ARM’s initial constant-rate period. Borrowers often choose to refinance the loans into another ARM or fixed-rate mortgage when their rate on the first loan is up for adjustment. An adjustable rate mortgage is not right for everyone and, ultimately, it depends on your comfort level with the risks, plan for the future, and financial stability.

When is an ARM a Good Option?

You Plan to Sell

If you are planning on selling before your rate is adjusted, it makes sense to take advantage of the benefits that come with an ARM loan. This allows you to pay the lower initial rate and move again if the market rates are higher when the fixed period expires.

You Want the Tax Deduction

If you are financing a home in order to benefit from a mortgage interest deduction, an ARM loan may be your best choice in a volatile market. Utilizing an ARM loan for a short-term tax deduction can have a significant impact on the amount of taxes you pay. Use the deduction to reduce your tax bill when you know you can retire within the lifetime of the fixed rate period. When you no longer need the deduction, you can pay off the loan.

You Are Able to Make Extra Payments

When you are capable of paying down the loan principal during the introductory period of an ARM loan, you are able to maximize your interest savings.

You Are Comfortable with the Risks

Housing market conditions can be predicted, but no one can anticipate every variable within the future. Borrowers who are not comfortable with a little risk are not great candidates for an ARM loan. There are numerous variables that impact the conditions and ability to refinance or sell after the initial rate period has come to an end. If you are not able to tolerate the risk of uncertainty, an ARM loan could be extremely overwhelming when faced with unforeseen issues that may translate into higher monthly payments.

Kimberley Development Corporation Can Help

Kimberley Development works with our homebuyers to help determine what loan option is best for you. Contact our team online or give us a call at 515-212-3927 to start the process of finding, or building your new Kimberley home.