How ARMs work
ARMs have a lower, fixed interest rate for the first few years of the loan, making repayment more affordable versus a 30-year, fixed-rate mortgage. After that period ends, the mortgage resets to a variable interest rate that changes annually or every six months (depending on the loan). That means monthly mortgage payments can go up or down, too.
At a 0.16% rate difference (6.23% fixed vs 6.07% ARM):
Jennifer Beeston, executive vice president of national sales with Rate, says she rarely recommends ARMs to most borrowers.
“For conventional loans, I don’t think the benefit in rate is worth the risk,” Beeston said.
“What people don’t realize is that with an ARM, you are committing to having to requalify for that loan should you decide to keep the house for an extended period of time,” she explained. In most cases, it doesn’t work in borrowers’ favor to keep an ARM after the introductory rate period ends, especially in today’s elevated rate environment.
Who should consider an ARM?
Today’s ARMs typically have initial fixed terms of five, seven or ten years, so they don’t pose the risk of early payment shock that pre-2008 ARMs did, MBA chief economist Mike Fratantoni noted in a news release.
“Half a percent on $100,000 is not worth the risk. Half a percent on $2 million? OK, let’s start talking about it,” she said.
“If you have something on the horizon where it’s not an issue — you’re going to be making more, your job is secure — great,” Beeston said. “But if you’re [maxed on] qualifying right now and you have nothing on the horizon for a pay increase, it can be very dangerous.”
“When you’re talking to someone, it should be, ‘here are your options,'” she said. “You need to ask a lot of questions and make sure you can understand the product.”