ARMs: What They Are and When They Might Make Sense
When most people think about a mortgage, they think about a traditional fixed-rate loan where the interest rate stays the same for the life of the loan. But there’s another option that may be worth considering depending on your goals: an Adjustable-Rate Mortgage, commonly known as an ARM. While ARMs aren’t as common as fixed-rate mortgages, they can offer advantages for certain homebuyers. The key is understanding how they work and whether they align with your plans.
What is an Adjustable-Rate Mortgage?
An Adjustable-Rate Mortgage is a home loan that begins with a fixed interest rate for a set period of time before it can adjust periodically based on market conditions. For example, a 7/1 ARM provides:
- A fixed interest rate for the first 7 years
- The potential for the rate to adjust once per year after that initial fixed period
During those first seven years, your rate and principal-and-interest payment remain unchanged, just like a fixed-rate mortgage.
Why Choose an ARM?
One of the biggest reasons buyers consider an ARM is that the initial interest rate is often lower than a comparable fixed-rate mortgage. A lower rate can potentially help buyers:
- Lower their monthly payment
- Increase purchasing power
- Keep more flexibility in their budget
- Reduce interest costs during the fixed-rate period
For some buyers, those benefits can make a meaningful difference when purchasing a home.
Who Might Benefit From an ARM?
An ARM isn’t the right fit for everyone, but it may be worth exploring if you:
- Don’t plan to stay in the home long-term
- Expect your income to increase
- Want a lower initial payment
What Are the Risks?
It’s important to understand that an ARM’s interest rate can increase after the fixed-rate period ends. If market interest rates rise, your mortgage payment could rise as well. That’s why an ARM should be viewed as a strategic option rather than simply the lowest-rate option. Understanding your long-term plans and comfort level with potential payment changes is essential.
The Bottom Line
An Adjustable-Rate Mortgage can be a valuable tool when used in the right situation. For buyers who don’t expect to stay in their home for decades, or who are looking for a lower initial rate, an ARM may be worth considering alongside traditional fixed-rate options. The most important step is understanding your choices before making a decision.
At Eagle Bank, our local residential lending team can help you compare your options and determine which mortgage solution best fits your goals. Reach out to a local lender to learn more.
Contact one of our expert lenders to learn more.
Massachusetts call:
Ingrid Mahoney (NMLS #463260)
617.694.9718
Maine call:
Ira Camp (NMLS #374801)
207.205.2977
