Adjustable-Rate Mortgages: Are They Making a Comeback?
Adjustable-rate mortgages (ARMs) were once a popular choice for homebuyers, offering lower interest rates and the potential for savings. However, after the 2008 financial crisis, ARMs fell out of favor as homebuyers sought the stability and security of fixed-rate mortgages. But in recent years, there has been a resurgence of interest in ARMs. So, the question is, are adjustable-rate mortgages making a comeback? Let’s dive in and explore the current landscape of ARMs and the reasons behind their potential resurgence.
What are Adjustable-Rate Mortgages?
Adjustable-rate mortgages are home loans with interest rates that can change periodically. In contrast, fixed-rate mortgages have interest rates that stay the same for the entire loan term. With an ARM, the initial interest rate is typically lower compared to a fixed-rate mortgage, which can be an attractive option for borrowers who plan to stay in their home for a short period. After the initial fixed-rate period, the interest rate will adjust at predetermined intervals based on market factors, such as the prime rate or the London Interbank Offered Rate (LIBOR). This adjustment can lead to a higher or lower monthly payment for the borrower.
The Resurgence of ARMs
Interest Rate Hikes
One of the main reasons behind the renewed interest in ARMs is rising interest rates. After nearly a decade of historically low-interest rates, the Federal Reserve has begun to raise rates. As of November 2018, the Fed has raised the federal funds rate nine times since 2015, with the current rate sitting at 2.25%. This increase in interest rates has made ARMs more appealing to homebuyers looking to take advantage of lower initial rates.
Lower Monthly Payments
Another factor driving the resurgence of ARMs is the potential for lower monthly payments. In a rising interest rate environment, a borrower with an ARM may see their monthly payment decrease when the loan adjusts. This can lead to significant savings over the life of the loan, especially for those who plan to sell or refinance their home before the adjustment period begins.
Shorter Loan Terms
Many homebuyers are also attracted to ARMs because of their shorter loan terms. While traditional fixed-rate mortgages typically offer loan terms of 30 years, ARMs often have initial fixed-rate periods of 5, 7, or 10 years. This shorter loan term can be beneficial for borrowers who plan to sell or refinance their home before the adjustment period begins. It can also be appealing to those who want to pay off their mortgage faster, with the option to refinance into a fixed-rate loan before the adjustment period begins.
Is an ARM right for you?
While adjustable-rate mortgages can offer lower interest rates and shorter loan terms, they are not the right choice for every homebuyer. It’s essential to carefully consider your financial situation and long-term plans before choosing an ARM. Here are a few things to keep in mind:
Future Plans
If you plan to sell or refinance your home before the loan adjustment period begins, an ARM could be a smart financial decision. However, if you plan to stay in your home long-term, a fixed-rate mortgage may be a better choice as it offers stability and predictability in monthly payments.
Interest Rate Movement
It’s essential to consider where interest rates are likely headed before choosing an ARM. If interest rates are expected to continue to rise, an ARM may not be the right choice as it could lead to increasing monthly payments in the future. However, if interest rates are expected to drop or remain relatively stable, an ARM may offer significant savings.
Personal Financial Situation
Finally, it’s essential to assess your personal financial situation and determine if you can handle a potential increase in monthly payments. With an ARM, your monthly payment could rise significantly after the initial fixed-rate period, and you should be prepared for that possibility.
The Bottom Line
Adjustable-rate mortgages may be making a comeback, but whether or not they are the right choice for you depends on your individual financial situation and long-term plans. With rising interest rates, ARMs can offer lower initial rates and shorter loan terms, making them an attractive option for some homebuyers. However, it’s essential to carefully weigh the potential risks and choose a mortgage that fits your current and future needs. As always, it’s crucial to consult with a trusted financial advisor to determine the best mortgage option for you.
