What You Need to Know About Adjustable-Rate Mortgages

In a rising rate environment, a home loan doesn’t have to cost an ARM and a leg.

Ali Hardy Feb 27, 2019

Interested in buying a home this year, but concerned about rising interest rates? You may want to consider an adjustable-rate mortgage, also known as an ARM. It might just be the option you’re looking for.

Historically, consumers have typically selected a traditional longer-term fixed-rate mortgage when buying a home. Since fixed-rate mortgages maintain the same interest rate for the life of the loan, there are no surprises. This is a great option — especially when rates are low — but it’s not the only option. For the right buyer, an ARM can be a great fit.

If you’re wondering whether an ARM is right for you, here’s what you need to know, according to Zions Bank’s Mortgage Division Manager Roger Jones.

Adjustable-rate mortgage consideration #1: Understand the basics

Zions Bank adjustable-rate mortgages include 3/1, 5/1, 7/1 and 10/1 loans. The first number indicates how long the interest rate is locked. For example, a 7/1 ARM has its initial rate locked for the first 7 years.

The second number indicates how often the interest rate adjusts after the initial period expires. In the case of the 7/1 ARM, the rate will adjust yearly for the remainder of the loan term based on market conditions. 

Zions Bank Mortgage Division Manager Roger Jones
Zions Bank Mortgage Division Manager Roger Jones.

Adjustable-rate mortgage consideration #2: Rates

ARMs typically have lower initial rates compared to fixed-rate mortgages, giving borrowers lower monthly payments in the first few years. As interest rates trend upward, Jones says this hybrid of an initially low fixed-rate period with later adjustments makes an ARM a strong option for some homebuyers.

Adjustable-rate mortgage consideration #3: Timing

Consider your time horizon when contemplating whether an ARM is right for you. Jones says if you plan to be in your house for a short period or have already determined that you do not need or want to pay for 30 years of a fixed rate, then an ARM may be the right choice. Keep in mind that the low rate is temporary, and payments and interest rates can increase when the rate adjustment period begins.

Adjustable-rate mortgage consideration #4: Flexibility

The ARM mortgage brings a degree of flexibility to consumers with regard home loan qualification, according to Jones. An ARM can often provide more options to a buyer that may have issues obtaining a traditional fixed-rate mortgage. Also, because interest rates are lower, some consumers have more home buying power with an ARM.

Adjustable-rate mortgage consideration #5: The risks

The risk of choosing an ARM is that your rate is not guaranteed. Jones notes that fixed-rate protection isn’t included during the adjustment period, so it’s important to be aware that your mortgage payments could increase once your rate lock expires. Before you commit to an ARM, research how high your payments could become, and whether there is a rate cap or maximum payment amount. Read the disclosures and carefully consider whether you could afford this payment, or whether the predictability and stability of a fixed-rate mortgage is a better fit.

Not sure if you want an adjustable-rate mortgage loan or a traditional fixed-rate mortgage? Visit the Zions Bank Home Loan Learning Center to compare home loans, answer your mortgage questions and discover additional mortgage resources, including a directory of Zions Bank mortgage lenders across Utah and Idaho as well as more information about the home buying process.

Loans are subject to credit approval. Terms and conditions apply. See a banker for details. Equal Housing Lender. NMLS #467014.

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