Today’s home buyers are not only facing higher interest rates, but also historically high home prices. The effect of these together is striking: The average mortgage payment is now more than $400 more per month than in January*. The combo of rising interest rates and home price appreciation has more home buyers researching adjustable-rate mortgages.
What is an adjustable-rate mortgage?
An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that changes over time, whereas a fixed-rate mortgage keeps the same interest rate and monthly payment** for the life of the loan. An ARM has an initial interest rate that is fixed for a set number of years — typically at a lower rate than a borrower could get with a fixed-rate mortgage — and then adjusts with certain frequency thereafter for the remaining term of the loan. The fixed-rate period for ARM loans can last for three, five, seven or 10 years, depending on the product selected.
ARMs can create more risk for the borrower; once the initial set interest rate expires, the interest rate can either increase or decrease. An unknown potential increase can make budgeting for this loan difficult.
So, who is a good candidate for an ARM?
Home buyers who might be a good candidate for an ARM are those who:
- Plan to move or sell their home within a short period of time before their initial mortgage rate adjusts.
- Are looking for the lowest interest rate or monthly payment, as ARMs often have a lower initial interest rate than fixed loans.
- Would rather save money now by having a lower monthly payment, but would be comfortable with making higher payments in the future.
Still have questions about ARMs?
Zillow Home Loans offers a variety of fixed-rate and ARM products. Contact one of our Zillow Home Loans loan officers to discuss your loan options.
*Assuming a new 30-year, fixed-rate loan on a typical U.S. home, according to the Zillow Home Value Index, at the current average mortgage rate according to the Freddie Mac Primary Mortgage Market Survey®. Principal and interest only.
**Only principal and interest remain static; other costs that may be wrapped into the monthly mortgage payment, such as homeowner’s insurance and property taxes, are subject to change.