Home prices in Washington State are currently higher than they’ve ever been before, and they’re expected to continue rising over the coming months. As a result of this trend, home buyers in Washington are always looking for ways to save money and reduce their monthly payments.
An adjustable-rate mortgage (ARM) loan is one strategy for securing a lower rate for Washington home buyers. That’s because they tend to start off with a lower level of interest, compared to a long-term fixed mortgage.
Could an ARM loan help you lower your monthly payments? Here’s what you should know about them.
ARM Loans: A Mortgage Option for Washington Home Buyers
As its name suggests, an adjustable-rate mortgage loan or ARM has an interest rate that can change over time. It can go up or down, depending on market conditions at the time of adjustment.
The initial rate on an adjustable home loan might stay the same for months or years, depending on how it is structured. For example, the commonly used 5/1 ARM has the same interest rate for the first five years, after which it will adjust every one year. That’s the “5/1” signifies.
Related: Explore other types of loans
Many ARM loans start off with a lower interest rate than a fixed mortgage. When this article was published, on May 25, 2017, the average rate for a 30-year fixed home loan was 3.95%. This is based on the weekly survey by Freddie Mac. The average rate assigned to a 5-year ARM loan was much lower at 3.07%. That’s a difference of 88 basis points, or 0.88%.
That’s why some borrowers in Washington choose to go the adjustable route. They do it to secure a lower rate and reduce their monthly mortgage payments — at least initially.
Lowering Your Monthly Payments
You can see how an ARM loan might help you lower your monthly payments, when buying a home in Washington State. By securing a lower mortgage rate, you’ll also be reducing the size of your monthly payments (compared to a fixed loan with a higher rate).
So if your top priority is to minimize the amount of money you pay each month toward your housing costs, you might want to consider using an adjustable-rate mortgage. Also keep in mind that it’s possible to refinance the loan down the road, if you want to switch over to fixed.
Fixed-Rate Loans Offer Stability at a Higher Price
The most popular type of home loan in Washington State is the 30-year fixed-rate mortgage. This particular product accounts for the highest percentage of market share, and by a pretty wide margin. The reason it’s so popular has to do with payment stability.
With this type of Washington mortgage loan, the interest rate and monthly payments usually stay the same — for the entire repayment term. The downside, as mentioned earlier, is that these loans tend to have higher rates than what you might start off with when using an ARM. You’re paying a premium for stability and predictability.
Many borrowers prefer the long-term stability of a fixed-rate loan, and they’re willing to pay a slightly higher rate for it. Others choose the ARM option as a way of reducing their monthly payments. There are pros and cons on both sides. As borrower, the best strategy is to choose a loan that will support your financial goals and priorities.
Ready to Explore Your Options?
Would you like to see how much money you might save during the initial years of an ARM loan? Want an estimate of your monthly housing payments? We can help. Our knowledgeable financing experts can help you explore your options to choose the best loan product for your situation. Our team has in-depth knowledge on all types of Washington mortgage loans, including ARMs.