If you’re a first-time homebuyer with limited funds, you may be considering going with an adjustable interest rate mortgage loan. These loans are attractive because they offer lower rates and flexible monthly payments than conventional fixed-rate mortgages. Let us help guide you with this.

What is an Adjustable Rate Mortgage (ARM)?

An adjustable-rate mortgage, or ARM, is a loan offered by lenders that allows the interest rate of the loan to fluctuate with the market. In other words, the interest rate of an ARM can change periodically. 

Fixed- vs. Adjustable-Rate Mortgage

Most mortgage loans are fixed rates, which means they have one interest rate that will stay the same for the life of the loan. That interest rate is determined when the loan is originated, and the rate stays the same throughout the life of the loan.

An adjustable-rate mortgage’s interest rate changes periodically based on the market, typically monthly. The interest rate is calculated based on a number of factors, including the interest rate index, or the prime rate, which is the interest rate at which banks offer their best business loans.

With an adjustable-rate mortgage, the interest rate may go up when a particular index, such as the prime rate, goes up. The rate may also go down when the index goes down.

Conforming vs. Non-Conforming ARMs

ARM loans are available in two types, conforming and non-conforming.

A conforming loan is a loan that adheres to the maximum loan amount and loan-to-value (LTV) ratio restrictions of Fannie Mae and Freddie Mac. These loans have limits on the loan amount, the LTV ratio, the interest rate, and the length of the loan.

A non-conforming loan is a loan that doesn’t adhere to any of the maximum loan amount and LTV ratio restrictions of Fannie Mae and Freddie Mac. These loans have no limits on the loan amount, the LTV ratio, the interest rate, and the length of the loan.

Who Should Get an ARM?

An adjustable-rate mortgage is a good option for borrowers who want the opportunity to obtain lower interest rates than what a fixed-rate mortgage offers.

The idea of having a lower interest rate is attractive to many consumers, but it’s important to weigh what will happen if the interest rate goes up. If it goes up, your monthly payments also go up.

If you have enough cash in your bank account to pay off your loan within the first five years, an ARM could be a good option.

However, if you have less cash to put down, then you should consider the potential risk of getting such a loan.

Should You Do It?

Having an adjustable-rate mortgage may be a good financial decision when you plan to pay off the loan within the first five years. However, if you want to pay off the loan over the long haul, you may want to consider a fixed-rate mortgage. This way, your loan payments won’t spike once  the ARM adjusts to a higher interest rate.

Get an adjustable-rate mortgage in Utah here at Clayson Mortgage. Our mortgage brokers will work for you, not the bank. Get in touch with us!