We’ve covered the different mortgage options available to Washington State home buyers in the past. Today, we’re going to zero in on one particular type of mortgage product, and that’s the adjustable-rate loan.
This financing option can offer savings during the first few years, which makes it attractive to budget-conscious home buyers. Here’s what you should know about it.
Adjustable-Rate Mortgage Options in Washington State
An adjustable-rate mortgage (ARM) loan is exactly what it sounds like. It is a home loan with an interest rate that changes, or adjusts, overtime.
This feature sets it apart from the fixed mortgage loan, which carries the same rate for entire repayment term. That’s one of your primary choices when shopping for a home loan in Washington State — fixed or ARM.
With most adjustable-rate mortgages, the interest rate will remain the same for the first few years before it starts to adjust. These are referred to as “hybrid” ARM loans, since they combine features of both an adjustable and a fixed mortgage.
The 5/1 ARM loan is a good example of a hybrid mortgage product. With this type of mortgage loan, the interest rate will remain fixed for the first five years. During that time, it essentially functions like a fixed-rate home loan. After that initial five-year period, however, the rate will begin to adjust every one year based on current market conditions and other factors.
That’s what the two numbers signify in the label. The first number tells you how long the rate remains fixed — the second number is the frequency (in years) of the subsequent adjustments.
Another example is the 7/1 adjustable-rate mortgage, which carries a fixed interest rate for the first seven years and then adjusts annually.
When Does It Make Sense to Use an ARM Loan?
You might wonder why a home buyer in Washington State would want a mortgage loan with an adjustable rate. After all, it brings some degree of uncertainty into the equation. The primary reason people choose ARM loans is to save money during the first few years.
Generally speaking, ARMs start off with lower interest rates than their fixed-rate counterparts. For instance, if you review Freddie Mac’s Primary Mortgage Market Survey (PMMS), you will see that the average rate for the five-year ARM loan is lower than the 30-year fixed mortgage.
Of course, with an ARM loan, the interest rate can change and possibly rise over time after the initial phase. But during those first few years, borrowers can enjoy a lower interest rate on average than those who use fixed mortgage loans.
Refinancing or Selling Before the Adjustments Begin
A lot of Washington State home buyers who use adjustable mortgages plan to either sell or refinance their homes before the adjustments begin.
ARM loans appeal to people who expect to be in a home for only a few years. Military members who change duty stations every few years are a good example. In this scenario, a Washington State home buyer could secure a lower mortgage rate by using an adjustable loan, and then sell the house a few years later before the rate starts adjusting.
That’s just one example of when it might make sense to use this particular mortgage option. The important thing to realize is that all mortgage loans have pros and cons associated with them. As a home buyer, the best strategy is to choose the type of loan that meets your financing goals.
- If you plan to stay in the house for a long time, and you prefer the stability of an unchanging interest rate, then you might be better off with a fixed-rate mortgage.
- If you want to get the lowest possible mortgage rate, and you’re okay with the idea that the loan that might adjust over time, then you’ll want to consider an ARM loan.
Different products for different scenarios.