Is an ARM right for your new construction?

There’s been a lot of talk in the news lately about mortgage rates and the affordability of building a home. Some homebuyers have found that an adjustable rate mortgage (ARM) is a good option for them. Since no financial solution is right for everyone, we want to introduce you to ARMs and invite you to follow up with a conversation about what they are and when they make sense.

How an ARM is structured

A hybrid ARM is a combination of a fixed-rate and variable-rate loan. This type of mortgage is structured with a lower fixed interest rate during the initial term (usually 5, 7, or 10 years) and then it shifts to the adjustable rate.* 

After the fixed rate period ends, your payments start to include the “adjustable” rate, which is based on a fluctuating industry benchmark plus a pre-determined margin above that rate. In most cases, the rate adjusts every 6 months for the remaining term of your mortgage.

The ARM is described as “years of initial term”/”frequency of rate adjustment” — for example, 5/6, 7/6, or 10/6. Most adjustable rates have a cap on how much the rate can increase annually or semiannually and/or over the lifetime of the loan.

3 times when an ARM makes sense

A key benefit of an adjustable-rate mortgage is lower payments in the early years. The potential downside to an ARM is that you may be caught off guard several years later when the rates go up at the end of the fixed-rate period. Here are some examples of situations that can be well-suited to an ARM:

  1. If you don’t plan to live in your home beyond the fixed rate term, this can be a smart way to lower your payments. Ideally, you’ll sell your home before the adjustable rate kicks in or shortly afterwards.
  2. If the home you’re building is your “starter” house, you may be attracted to the lower initial payments so you can save up for your next construction project.
  3. If you anticipate an income increase in a few years, it may be easier to qualify for the size mortgage you want now if you choose an ARM with lower up-front payments. Sources of future income may include having a stay-at-home parent who plans to return to work later, those starting out in careers with accelerated income growth, or people who anticipate receiving a large sum of money in the near future.

Whether you’re buying or refinancing, be sure to take into account any appraisal fees, closing costs, and other expenses. We can help you walk through all of those details.

We’re here for your needs

Choosing a mortgage can be overwhelming. Choosing the right mortgage provider shouldn’t be. Reach out to one of our loan officers — they can help you make the right decision for your homebuying needs.

*Please note these are just a few examples; ask your loan officer if other options are available. 

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