What is an ARM Loan?


You may have noticed a resurgence in the popularity of Adjustable-Rate Mortgage (ARM) loans recently. They’re a great option for members to save on their monthly payments, especially in a rising rate environment. Whether it’s a good option for you depends on what you’re looking to achieve with your next home loan.

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How do ARMs work?

ARM loans, sometimes referred to as variable-rate mortgages, are unique because unlike a conventional mortgage, the interest rate changes throughout the life of the loan. The rate for an ARM loan varies depending on the lender. How often it will change, and by how much, depends on the terms of the ARM.

For example, a 7-year ARM, commonly notated as a 7/1 or 7/6 ARM, has a fixed interest rate for the first seven years. After that time, the rate could change once a year or every six months (depending on the second number) for the remainder of the mortgage term. If it’s a 5/1 ARM, the rate would adjust after five years, and once a year after that, and so on.

The key to understanding how much your interest rate can change is to look at the rate cap term. Mortgage Center offers 2/2/5, meaning your initial change is 2%, each subsequent change is 2%, and the lifetime cap is 5%. The caps are set by the lender. Many lenders are opting for an initial cap of 5%, meaning your first rate could jump to the maximum rate in one year. These caps are in place to protect the borrower. They ensure the rate never fluctuates beyond a reasonable percentage, so the borrower isn’t caught off-guard by a large change in their monthly payment.


What are the advantages of an ARM loan?

ARM loans are typically offered at a lower initial interest rate than a conventional loan. Which means you are likely to get a lower monthly payment at the beginning of your mortgage. While interest rates on ARM loans will change, it doesn’t necessarily mean the rate will increase. So, you could get a lower monthly payment after the first adjustment period as well.


Who could benefit from an ARM loan?

ARM loans aren’t for everyone. It could be a great option for anyone who plans on moving or refinancing their mortgage before the end of the introductory fixed-rate period.

It’s also a great option for anyone who wants the benefit of getting a lower initial rate than a fixed-rate mortgage that comes with an ARM loan. Lastly, if you believe interest rates may decrease in the future, an ARM loan could adjust to a lower rate and help you save on your monthly payment.


Decide if an ARM loan is right for you

When considering an ARM loan, try asking yourself these questions:

  • “How long do I plan to own the home?”
  • “How important is payment security?”
  • “Is it likely your income will increase in the future? Is it possible it could decrease?”
  • “Do you anticipate any major future expenses like tuition, new car, etc.?”
  • “What are your interest rate expectations?”

Based on how you answered these, you should have a good understanding of whether an ARM loan will fit your financial needs.

Check out our ARM rates and see if you could save!


The Mortgage Center Difference

Due to the ever-changing rates market, ARMs can be riskier for those who aren’t always paying attention to the market. That’s where Mortgage Center comes in. When our team of experts sees a major rate change, we’ll notify you in advance. This way, you’ll have ample time to decide how to move forward with your loan.


ARM Loan Options

Mortgage Center is now offering ARM loan options for some of our most popular loan products, including:

  • PMI Saver: This loan allows you to avoid the cost of PMI with a down payment as low as 10%.
  • Golden Jumbo Loan: This loan allows you to receive financing for a home with a price tag that exceeds government loan limits.


Mortgage Center

Mortgage Center has been working with credit unions, their members, and home loan borrowers since 1990 with the goal of growing the credit union community. They have over 100 experienced home loan experts who are guided by the core values of the company. Mortgage Center is completely owned by credit unions which means their rates and closing costs remain competitively low, keeping more cash in members’ pockets while generating revenue for the credit union community. Start a mortgage application with us today!


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