Estimated reading time: 2 minutes
When people think of a mortgage interest rate, they most likely imagine a long-term fixed rate. This type of interest rate is popular because of its predictability, but it isn’t the only option homebuyers have.
Adjustable-rate mortgages (ARMs) offer an alternative. Instead of being locked into the same interest rate over the lifetime of your loan, an ARM is only fixed for an initial period. After this expires, the interest rate fluctuates and changes.
Let’s explore the top reasons a homebuyer may choose an adjustable-rate mortgage over a fixed-rate.
Adjustable-rate mortgages often have significantly lower rates than many fixed rate options. Fixed-rate mortgages usually hold a higher interest rate because the lender needs to predict how the market will influence interest. By design, an ARM’s rate will fluctuate with the market according to the terms you chose. They can offer the ability to purchase a home with a lower initial monthly payment.
Mortgage lenders use a formula to calculate a person’s debt-to-income ratio to see if their budget can handle a mortgage. Even a singular point percentage of your interest rate can influence your monthly mortgage payment and housing budget by $200-$300. With a lower interest rate from the adjustable-rate, your debt-to-income may allow you to qualify for more house and expand your potential home pool.
The first few monthly payments for a fixed rate mortgage mainly pay down your interest. As your ARM may offer a lower payment, you may be able to pay more toward your mortgage’s principal balance. Those additional payments help homeowners build equity faster and reduce the amount of interest you’ll owe later on.
A homeowner moves every seven years, on average. If you’re beginning to reach the end of your fixed rate period and the current rate market is higher than you’re comfortable paying, you can use the equity you’ve built to sell your home and move.
On the other hand, if you notice that the market rates have begun to drop, a homeowner may wish to refinance their adjustable-rate for a fixed-rate to continue to have the advantage.
Now that you know a little bit more about adjustable-rate mortgages, contact us to learn more! Our expert Licensed Loan Originators will be with you every step of the way until you reach your home financing goals!
Homestead Funding offers exceptional customer service and a convenient mortgage process. Whatever your financing needs, our goal is to exceed your expectations.
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