Most home buyers in Washington State rely on the “standard” 30-year fixed-rate mortgage loan to finance their purchases. But there are some home-buying scenarios where it might make sense to use an adjustable-rate mortgage loan, or ARM.
Here are five things you should know about using an ARM loan to buy a house in Washington.
1. Most ARMs in use today are actually “hybrid” loans.
Most of the adjustable mortgage loans available in Washington State these days are actually considered “hybrid” loans. They get this name because they combine features of both a fixed and adjustable mortgage product. The 5/1 ARM is a good example. Those numbers indicate that the rate remains fixed (unchanging) for the first five years, after which it will adjust (change) each year.
2. You’ll probably start off with a lower mortgage rate.
One of the advantages of using an ARM loan to buy a home in Washington is that you could secure a lower rate, compared to a fixed mortgage. That’s because ARMs typically start out at a lower interest rate than their fixed counterparts.
Example: When this article was published in July 2018, the average rate for a 30-year fixed mortgage loan was 4.54%, while the average for a 5-year ARM was 3.87%. So there’s a potential for savings during the initial stage of an adjustable loan, due to the lower rate that’s assigned.
3. Your rate can adjust once the introductory period has passed.
As mentioned above, a lot of the adjustable mortgage loans used in Washington start off with a lower rate than a fixed mortgage. And it might stay that way for several months, a year, or even a few years. But that can all change after the initial/introductory period is over.
When this introductory period has passed, your interest rate will begin to change. It might go up or down, depending on market trends. Most ARM loans are tied to a certain “index,” such as the London Inter-Bank Offer Rate (LIBOR).
4. It can be a good financing strategy in some home-buying scenarios.
“Why would someone want to use a mortgage loan with a rate that could rise over time?”
This is a common question among home buyers. The answer is that, in certain situations, an ARM loan is the right “tool” for the job. It can be a real money-saver, due to the lower initial rate.
A lot of the folks who use these loans plan to either sell or refinance their homes down the road. So the logic is that they’ll use an adjustable-rate mortgage initially to get the lowest possible interest rate, and then either replace it (by refinancing) or pay it off (by selling) a few years down the road.
5. The 30-year fixed-rate mortgage is still more popular by far.
The 30-year fixed-rate mortgage is by far the most popular type of loan among home buyers in Washington State, and across the country. A lot of borrowers prefer that financing option because it offers the most stability and predictability over the long term. But this usually comes at a cost, in the form of a higher interest rate (when compared to the initial rate on an ARM loan).
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