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Adjustable-Rate Mortgages in 2023: The Pros and Cons
In the last couple years, the housing industry saw sky-high home prices, and rock-bottom interest rates. This juxtaposition was great for the market. But now with mortgage rates much higher and home prices still trending upward—home buyers are taking advantage of other loan options. One of these is an Adjustable-Rate Mortgage (ARM).
ARMs have become increasingly popular over the last year. In fact, according to Mortgage Bankers Association, ARMs have tripled since the beginning of 2022. Many home buyers and finding this type of loan to be the best option for them during the current economic climate.
What is an Adjustable-Rate Mortgage?
The key word in ARM is “adjustable.” Adjustable-rate mortgage loans begin with a fixed, low interest rate. That rate stays the same for the introductory period of the loan. Depending on which a person gets it could be five (most common), seven or ten years. Once that introductory period ends, the rates will begin to adjust based on market interest rates. The most common ARM structure is a 5/1 ARM, meaning a low initial interest rate for five years, then the rate will adjust ever year after.
The Pros of an Adjustable-Rate Mortgage
Many buyers are taking advantage of ARM right now, and for good reason. With the current interest rates pushing many buyers out of the market, using an ARM can bring them back in the game. Here are some reasons for getting an ARM in 2023:
- ARMs often offer interest rates and entire point lower than the current 30-year fixed rate mortgages. And sometimes an ARM can even be lower than an entire point! This means big monthly savings for a buyer. ARMs are offering even lower mortgage interest rates than 15-year-fixed loans according to Freddie Mac.
- If homeownership is your main priority, an ARM can help you achieve your goal. If you want to begin the journey of homeownership for the first time, this type of mortgage may be perfect. Especially if the home you’re looking for isn’t necessarily your forever home.
- Current mortgage rates are being predicted to drop by housing experts. In one of our recent blogs, we discussed industry expert predictions for interest rates in 2023. Across the board, most agree they believe rates will begin to drop in the next two years. If you get an ARM, this means you can refinance when rates get lower and lock into a fixed-rate you are comfortable with.
- ARMs have payment caps. This is basically a limit on how much your mortgage rate and payment can go up. The caps apply to how much the rate can change per adjustment period, and also over the lifetime of the loan.
- Your payments could very well go down. If the interest rates drop after your introductory period, your monthly payment could as well. But remember there’s a flip side to this as well.
The Cons of an Adjustable-Rate Mortgage:
As you know, interest rates are influenced by so much in our economy. At any given time, they can rise or fall. Many buyers aren’t willing to risk the chance of rates going up in order to get their home now. A lot of this depends on the state of the market, and what predictions are head. Here are some reasons for not getting an ARM in 2023:
- The rates could rise. Even though an ARM gives you a set introductory period where your rate will not change (unless you refinance), this time will come to an end. And then what? A lot of buyers are concerned with rates increasing at that time, and their monthly payments going up.
- ARMS can be complex. Unlike a fixed-rate mortgage, ARMs come with more fees and structures. If a buyer doesn’t fully understand this type of loan, they could get themselves into trouble. That’s why it’s so important to have a trusted lender and real estate agent to help navigate the process and make the best decision.
- If you’re looking for your forever home, an ARM may not be the best fit. A fixed-rate mortgage will keep your principal and interest rate the same for the entire term of the loan. For many people, this saves money and gives a peace of mind.
The bottom-line is, ARMs give some buyers and option to become home owners in a market that may not be as accommodating otherwise. Its up to the buyer to assess the risks and benefits, work with trusted real estate partners, and make the best decision based on their unique needs.
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