A 7/1 ARM is a good option if you intend to live in your new house for less than seven years or plan to refinance your home within the same timeframe. An ARM tends to have lower initial rates than a fixed-rate loan, so you can take advantage of the lower payment for the introductory period.
Short-Term Homeowner
For those who know they'll move out of a home before the end of the teaser period, an ARM can make sense. “Typically it comes down to whether you have changes coming in the next few years,” Parker says. “We see a lot of military borrowers who know they'll move in three to five years.
But an 7-year ARM could be a “good risk” for mortgage consumers. It offers low rates, and two additional years of fixed payments compared to the more popular 5-year ARM. That extra time to sell or refinance could be the sweet spot for those who will not keep their home the full thirty years.
Adjustable Rate (ARM) Mortgages Have Been Shunned For Years — But Should Be Considered In 2022. During the last few years, few mortgage borrowers have bothered with adjustable rate mortgages (ARMs). According to analysts at Ellie Mae, market share for the ARM mortgage is about four percent of all mortgages sold.
An ARM can be a good idea if your life is likely to change in the next few years — for instance, if you plan to move or sell the house. You can enjoy the ARM's fixed-rate period and sell before it ends and the less-predictable adjustable phase starts.
Most importantly, with a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.
ARMs are easier to qualify for than fixed-rate loans, but you can get 30-year loan terms for both. An ARM might be better for you if you plan on staying in your home for a short period of time, interest rates are high or you want to use the savings in interest rate to pay down the principal on your loan.
For example, if you plan to live in your house for eight to 10 years, taking out a 10/1 ARM (where the introductory rate lasts 10 years) is more cost-effective. A 10/1 ARM is usually between 0.25% to 0.5% less expensive than a 30-year fixed-rate mortgage.
Cons of an adjustable-rate mortgage
Rates and payments can rise significantly over the life of the loan, which can be a shock to your budget. Some annual caps don't apply to the initial loan adjustment, making it difficult to swallow that first reset. ARMs are more complex than their fixed-rate counterparts.
If an adjustable rate makes sense and provides them a lower payment, then I will be very comfortable to recommend an ARM. If you're using a 7- or 10-year ARM term, it allows you to potentially qualify for a higher loan amount and buy more house at the initial note rate.
Prepayment penalties.
Some ARMs, especially interest only and payment options, charge fees if you try to pay off the loan early. That means if you decided to sell your home or refinance it, you will pay a penalty on top of paying off the balance on your loan.
Another con of an ARM is that your loan terms and interest rate may at first be more lenient because of the lower monthly payments. So, if you want to refinance down the line into a fixed rate, it could be difficult to get approved for the same size mortgage loan.
(Adjustable-rate mortgages, or ARMs, require higher PMI payments than fixed-rate mortgages.)
Adjustable-rate mortgages aren't for everyone, and can be a very bad idea for some people. An ARM offers a short-term fixed rate now in exchange for potentially higher rates later. A 5/1 ARM, for example, would have a fixed rate for 5 years, and reset once per year thereafter.
Variable-rate mortgages are often the best choice
According to many economic experts, in most cases variable-rate mortgages are more beneficial in the long-term compared to fixed-rate mortgages.
If you decide to refinance from an ARM to a fixed-rate mortgage, there's good news! The refinancing process is relatively straightforward and is similar to when you purchased your home. When you refinance, you take out another loan that gets used to pay off your original note. Then, you pay on the new mortgage.
ARMs are also attractive because their low initial payments often enable the borrower to qualify for a larger loan and, in a falling-interest-rate environment, allow the borrower to enjoy lower interest rates (and lower payments) without the need to refinance the mortgage.
Often, he says, people will find that the 10/6 ARM is “the best of both worlds,” giving them a lower interest rate than fixed rate loans such as a 30-year fixed but with more stability than a 5/6 ARM.
Cons of Adjustable-Rate Mortgages
You could be left with a much higher payment. You might buy more house than you can afford. Budget and financial planning is more difficult. You might end up owing more than your house is worth.
The 5/5 ARM can be ideal for homebuyers who: Want to quickly pay down their mortgage. Expect substantial increases in their income over time. Plan to sell their home within a few years.
You can sometimes pay off a 10/1 ARM early by taking advantage of the fixed-rate period. While you're paying lower interest, you can put extra cash toward the principal amount. That way, variable interest rates later on are based on a lower principal amount, which would bring your monthly payments down.
What is the 15/15 ARM? A 15/15 ARM is a specific type of adjustable-rate mortgage where the interest rate is fixed for 15 years, it adjusts once and then it remains at that new interest rate for the remaining life of the loan.
For people in this position, an ARM could be a cheaper option than a fixed-rate mortgage. Especially if you know you'll have to move in the next 5-10 years. But even in this circumstance, you'll want to run the numbers. With an ARM, you're still responsible for closing costs.
Adjustable-Rate Mortgage Benefits
The bank (usually) rewards you with a lower initial rate because you're taking the risk that interest rates could rise in the future. 2 Contrast the situation with a fixed-rate mortgage, where the bank takes that risk.
With an ARM, borrowers lock in an interest rate, usually a low one, for a set period of time. When that time frame ends, the mortgage interest rate resets to whatever the prevailing interest rate is.