4 Reasons Why ARMs Are Generally Better Than Fixed Rate Mortgages
Here’s when you should use an ARM.
- The introductory interest rate on an ARM is lower than the interest rate on a comparable fixed rate mortgage.
- Due to its lower initial monthly payments, it may be easier to qualify for ARMs and you may qualify for a larger home loan.
- ARMs may be best for those who plan to sell their home before the end of the introductory rate term or plan to refinance in a few years.
In the world of mortgages, there are two main types of interest rates: fixed rates and adjustable rates. A fixed rate mortgage maintains the same interest rate for the life of the loan, while an adjustable rate mortgage (ARM) has an interest rate that can change over time. You’ll typically get a lower introductory rate for three to 10 years, then the rate will change each year based on prevailing interest rates. While both have their advantages, ARMs can be better than fixed rate mortgages for several reasons.
1. ARMs have lower introductory interest rates
The initial interest rate on an ARM is generally lower than the interest rate on a comparable fixed rate mortgage. Indeed, with an ARM, the borrower takes on more risk since the interest rate could potentially increase in the future. As a result, borrowers benefit from a lower rate when first taking out the loan.
With mortgage rates having more than doubled since the start of the year, ARMs have become more popular as people look to save on interest and hope that interest rates will come down as inflation subsides. ARM interest rates are typically 0.5% to 1.5% lower than a conventional 30-year mortgage. For a $500,000 home, that can be a savings of $500 per month.
2. ARMS are easier to qualify
In general, it is easier to qualify for an ARM than for a fixed rate mortgage. This is because the interest rate is lower and therefore the monthly payment is lower too. However, lenders will take into account that the interest rate on an ARM may increase in the future when determining whether or not you qualify for the loan.
3. ARMS can help you get a bigger loan
Since ARMs generally have lower interest rates than fixed rate loans, they result in lower monthly payments. This can help you get a higher loan amount because lenders will consider your other monthly payments to determine how much they’re willing to lend you.
4. ARMs allow you to take advantage of lower interest rates
Interest rates have risen 3% so far this year, the biggest increase in 40 years. If you get an ARM now and interest rates drop in the future, you could take advantage of lower interest rates without having to refinance. By avoiding a refinance, you won’t have to pay closing costs, and your interest rate and monthly payment could go down without you having to do anything. However, if interest rates rise, your payments will be higher. It is therefore important to understand the risks of an MRA before deciding to get one.
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Who are ARMs used for?
Although ARMs are suitable for a wide range of borrowers, they can be particularly useful for:
- Homebuyers who plan to sell their home before the end of the introductory rate period
- Homebuyers who want to keep their monthly payments low during the first years of homeownership
- Borrowers who want to qualify for a larger loan
- Borrower who plans to refinance his loan after a few years
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ARMs typically have lower initial payments, but these may increase after the initial rate period ends. During the 2008 financial crisis, many homeowners saw their interest rates rise and were unable to pay the new monthly payments. Fixed rate loans are usually more expensive upfront, but are more predictable since your payments don’t change.
An ARM could be worth it if you sell the house or pay off the mortgage in 10 years or less. But a fixed rate mortgage would probably work best if this will be your forever home and you want the certainty of a stable interest rate and monthly payment.
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