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Adjustable Rate Mortgage (ARM): Smart Savings for Short-Term Plans

Designed with initial interest rates that are lower compared to fixed-rate mortgages and adjust periodically over time. Ideal for individuals seeking short-term homeownership, anticipating future income growth, or dealing with exorbitant fixed mortgage rates.

ADJUSTABLE-RATE MORTGAGES

IS IT RIGHT FOR YOU?

Thinking about a flexible mortgage option? An Adjustable Rate Mortgage (ARM) might be just what you need! Unlike fixed-rate mortgages, where the interest rate stays the same for the life of the loan, the interest rate on an ARM changes periodically. The initial interest rate of an ARM is usually lower than that of a fixed-rate mortgage, offering you a more affordable start.


Why might you choose an Adjustable Rate Mortgage? It's a fantastic option if you plan to own your home for only a few years, expect an increase in future earnings, or if the prevailing interest rate for a fixed mortgage is too high.


Who can benefit from an Adjustable Rate Mortgage?

  • Homebuyers planning to move or refinance within a few years
  • Homebuyers expecting their income to increase in the future
  • Homebuyers looking for a lower initial interest rate


Whether you're a first-time homebuyer or a repeat buyer, we'll help you find the right loan for you. Let's make your homeownership dreams a reality!

ADJUSTABLE-RATE MORTGAGES

Benefits And Requirements

  • BENEFITS OF AN ADJUSTABLE-RATE MORTGAGE (ARM)

    • Initial Lower Interest Rate: ARMs often start with a lower initial interest rate compared to fixed-rate mortgages, resulting in lower initial monthly payments and potentially making homeownership more affordable.
    • Potential for Lower Payments: If interest rates decrease or remain stable after the initial fixed period, borrowers may benefit from lower monthly payments, providing financial relief.
    • Flexibility: ARMs typically offer more flexibility than fixed-rate mortgages, allowing borrowers to take advantage of changing market conditions and potentially reducing overall borrowing costs.
    • Shorter Initial Fixed Period: Some ARMs offer an initial fixed period, during which the interest rate remains constant, providing stability before any potential adjustments occur.
    • Ability to Qualify for Higher Loan Amounts: Lower initial monthly payments may enable borrowers to qualify for higher loan amounts, expanding their purchasing options.

  • REQUIREMENTS FOR AN ADJUSTABLE-RATE MORTGAGE (ARM)

    • Credit Score: Lenders typically require a good to excellent credit score to qualify for an ARM. While specific requirements may vary, a score of 620 or higher is often recommended.
    • Income Verification: Proof of stable income and employment is necessary to ensure borrowers can afford monthly payments, especially after potential rate adjustments.
    • Debt-to-Income Ratio: Lenders assess borrowers' debt-to-income (DTI) ratio to ensure they can comfortably manage monthly payments, both initially and after any adjustments.
    • Down Payment: While down payment requirements may vary, a down payment of at least 3% to 20% of the home's purchase price is typically required.
    • Property Appraisal: The property must be appraised to determine its value and ensure it meets lending standards.
    • Financial Reserves: Lenders may require borrowers to have sufficient financial reserves to cover potential payment increases after rate adjustments.

  • DOCUMENTATION NEEDED FOR LOAN APPROVAL WITH AN ADJUSTABLE-RATE MORTGAGE (ARM)

    • Proof of Income: Recent pay stubs, W-2 forms, and tax returns for the past two years to verify income stability.
    • Employment Verification: Contact information for employers and possibly bank statements showing regular income deposits.
    • Credit History: Authorization for lenders to pull credit reports to assess credit history and score.
    • Asset Documentation: Bank statements and investment account statements to verify assets.
    • Identification: Valid identification such as a driver's license or passport to verify identity.
    • Property Documentation: Documentation related to the property purchase, including the purchase contract and any appraisals or inspections.

ADJUSTABLE-RATE MORTGAGES

PROS and CONS

Pros:


  • Lower Initial Interest Rate: ARMs typically offer lower initial interest rates compared to fixed-rate mortgages, resulting in lower initial monthly payments and potentially making homeownership more affordable, especially in the short term.
  • Potential for Lower Payments: If interest rates decrease or remain stable after the initial fixed period, borrowers may benefit from lower monthly payments, providing financial relief.
  • Flexibility: ARMs offer more flexibility than fixed-rate mortgages, allowing borrowers to take advantage of changing market conditions. Borrowers may benefit from lower rates in the future, reducing overall borrowing costs.
  • Shorter Initial Fixed Period: Some ARMs offer an initial fixed period, during which the interest rate remains constant, providing stability before any potential adjustments occur.
  • Ability to Qualify for Higher Loan Amounts: Lower initial monthly payments may enable borrowers to qualify for higher loan amounts, expanding their purchasing options.

Cons:


  • Interest Rate Uncertainty: The primary risk of ARMs is interest rate uncertainty. After the initial fixed period, the interest rate and monthly payments may adjust annually or semi-annually based on market conditions, potentially leading to higher payments.
  • Payment Shock: Significant increases in interest rates can lead to "payment shock," where monthly payments spike, potentially causing financial strain for borrowers, especially if they're unprepared for the increase.
  • Potential for Negative Amortization: Some ARMs have features that allow for negative amortization, where the outstanding loan balance increases over time, even if payments are made on time. This can result in owing more on the mortgage than the original loan amount.
  • Complexity: ARMs can be more complex than fixed-rate mortgages due to variable interest rates and adjustment periods. Borrowers must understand the terms of their loan and be prepared for potential rate adjustments.
  • Market Risks: ARMs are sensitive to changes in market interest rates. Economic factors, such as inflation or changes in monetary policy, can impact interest rates and lead to unpredictable adjustments in monthly payments.
  • Limited Stability: Unlike fixed-rate mortgages, where monthly payments remain constant, ARMs offer less stability, making it challenging to budget for future housing costs.

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