Are Adjustable Rate Mortgages (ARMs) Right For You?

Evaluating the Viability of Adjustable Rate Mortgages in the Current Market

What To Know About ARM Loans in Kansas City

With the current interest rates affecting the traditional 15 or 30-year fixed rate loans, some are researching and considering an adjustable rate mortgage loan, more commonly known as an ARM. In today's blog, we'll cover the basics of an ARM, the most common form of an ARM, what differentiates ARMs of today vs. the Great Recession, and how to evaluate if an ARM is right for you.

What Is an ARM Loan?

An ARM loan is a type of mortgage where the interest rate can change over time, based on a number of factors. In essence, an ARM margin is composed of the index or benchmark rate, which can change over time depending on the loan, and the margin, which is a fixed rate that is determined at the origination of the loan. In the past, the index was typically based on the London Interbank Offered Rate, also known as the LIBOR, but will soon be replaced by the Secured Overnight Financing Rate (SOFR). The ARM margin, on the other hand, is a fixed percentage rate that is added to the indexed rate of interest. This ARM margin will depend on the credit of the borrower, and the conditions of the market at the time of lending. 

The Most Common Type of ARM Loan

Hybrid ARM

The Hybrid ARM is the most common type of ARM loan on the market today. This type of loan features a fixed interest rate at the beginning of the loan, and will then turn into a variable rate at a predetermined time. These types of ARMs will be presented to you with two different numbers with a slash mark between them. The first number will indicate the length of time in years that the fixed rate will be applied, with the second number representing the remaining time on the loan where the variable or floating rate will be applied.

For example, a 5/1 loan is a very common type of hybrid ARM, where you have a 5-year fixed rate, and then a rate that changes based on the index or benchmark every year afterward.

The Difference in ARMs Today vs. ARMs of the Past

After the Great Recession, Congress passed the Dodd-Frank Act to regulate the financial industry, which in turn protects those looking for mortgages by requiring them to be able to show proof of income before getting a mortgage. This means that while ARM loans can carry a certain level of risk depending on your personal financial situation and the market, they are not the inherent risk they might have been before and during the financial crisis of 2008.

Evaluating If an ARM is Right For You

So what types of homebuyers can benefit from an ARM loan? Homebuyers that are not looking to live in a home for a long period of time could benefit from an ARM loan, particularly a hybrid ARM where they can enjoy the benefits of the low fixed rate at the beginning of the ARM. Even with this knowledge, an ARM loan is only a good choice depending on your financial situation. That interest rate WILL reset over time, and will more than likely reset in the increasing direction. If you have bad credit or are unsure about maintaining the necessary income in order to continue paying your loan, the financial uncertainty of an ARM loan might not be the right choice for you.

If you want to better understand your loan options or if an ARM loan is right for you, contact a member of our team at the Ask Cathy Marketing Group. When considering a mortgage loan of any kind, particularly an ARM loan, it is essential that you talk with an expert to understand all of the necessary details. We know how to evaluate and help you choose the best option depending on your financial situation, and the current market conditions. 

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