Adjustable Rate Mortgage, otherwise known as ARM, is a loan that starts with a fixed lower interest rate for a period of time, then the rate changes. The interest rate usually increases, but the rate could decrease depending on market rates at the time.
At Idaho Central Credit Union, we offer 5/5 ARM home loans. A 5/5 ARM has an initial fixed interest rate for the first 5 years, and the rate will be fixed at “below market rate” to help you gain buying power. After the fixed period expires, the rate may adjust every 5 years. Each 5th year thereafter, the rate will adjust on the anniversary date until the loan is pain in full. This means that you not only get an amazingly low introductory fixed-interest rate for 5 years, but you also get to lock the next best rate for another 5 years. The less frequent adjustments help you worry less about when your monthly payment will go up again, and provides the ability to plan ahead.
So when would an ARM be a good fit for you?
Are you planning on moving soon?
If you know you will be moving for work or other reasons, an ARM is a great way to take advantage of a lower interest rate and monthly payment. You can take advantage of the low monthly payment while building equity quickly. This helps you have peace of mind when you are preparing to sell your home. Whether you want to move into a different home, or turn your home into a rental property, an ARM can help you save on interest paid and maximize your earned equity in a shorter amount of time.
How high is the current market rate?
You can’t always predict the best time to buy a home. Often, the market is changing and when you find a home you want to purchase, you have to act fast. If, at the time, mortgage rates are too high for comfort, it might not seem like the ideal time. An ARM can help bridge the gap. Since ARMs typically come with a below market introductory interest rate, you may be able to get into the home you want without being overwhelmed with a larger monthly payment. Then, if the market rates have gone down when your rate will adjust, you can refinance your home with a fixed-interest rate mortgage.
Will you be able to pay off a large portion, or all, of the loan quickly?
While the ARM interest rate could decrease after the introductory period, this is not usually the case. If you know you will have paid off all or the majority of your loan before your rate increases, take advantage of the lower interest rate and monthly payment! With an ARM loan and some good timing, you can pay off your home in a short amount of time with less interest.
How quickly do you want to build equity?
Since an ARM comes with a lower interest rate, it allows you to also build equity faster. With a lower interest rate, you will be paying more on principal and less on interest, thus building equity faster than most fixed-rate loans. There are many reasons you might want to build equity at an accelerated rate, such as to be able to take out a home equity loan for home improvements, or if you plan to sell the home sooner rather than later.
Do you need or want a lower monthly payment?
Good news! A lower rate also means a lower payment. If you are hoping for a lower monthly payment for a few years to give your finances a little extra wiggle room, an ARM can be a great way to do that. Whether it’s more cash flow for savings, monthly spending, or being able to make extra payments on your auto or student loans, an ARM can help you free up your income to pay off smaller debts.
Idaho Central offers a variety of home loans designed specifically to meet your needs. Whether you need your first home or are looking to upgrade, we are able and willing to help. Get to know more about our Advantage Adjustable Rate Mortgage and speak to one of our Mortgage Loan Officers today!