As average interest rates on mortgages have climbed steadily upward in recent months, some buyers are feeling priced out of the market and are putting their homeownership plans on standby. If this sounds like you, you may also be wondering if there are any options available to you that can possibly provide a break on rates.

It turns out, there are! Among them are temporary buydowns, long-term rate locks, and many more we covered in a previous blog, including adjustable-rate mortgages, or ARMs.

While not the first choice for most homebuyers, ARMs have become more popular recently as the average mortgage rate continues to rise. The Mortgage Bankers Association reports that in mid-May 2022, ARMs accounted for 11% of the home financing market for purchases, their largest share of overall mortgages since 2008.

Here are the answers to 4 commonly asked questions about ARMs:

What is an adjustable rate mortgage?
An ARM has an initial rate that’s typically lower than a fixed-rate mortgage. That’s why ARMs are more common when average rates are on the high side. After an established period of time (usually 5, 7, or 10 years) the rate changes based on the market conditions on the date of each adjustment.

Are adjustable rate mortgages risky?
One potential downside of an ARM is your monthly mortgage payment could go up if average rates are higher than the loan’s initial rate when the adjustment date arrives. The good news is, there are caps that limit how much your interest rate or monthly payment can increase with each adjustment. Of course, if average rates are lower, your monthly mortgage payment could go down as a result of the adjustment.

Can I refinance an adjustable rate mortgage?
Yes. Let’s say you have an ARM, and on the next adjustment date, the rate looks like it will rise to a level you’re not comfortable with. You can refinance to a fixed-rate loan to eliminate the uncertainly of how much your monthly mortgage payment will be over the life of your loan.

Is an adjustable rate mortgage right for me?
ARMs aren’t for everyone, but they can be a good choice in certain circumstances. For example, the ARM option should receive some consideration from borrowers who expect to sell their home before the rate adjusts (such as a first-time homeowner buying a starter home, someone who frequently relocates because of their job, or a growing family that will need more room in the future). Also, prevailing mortgage rates aren’t always ideal when you want or need to buy a home. If the lower initial rate of an ARM makes it possible for you to afford a home now, this type of home loan is definitely worth exploring.

Whatever you decide, we’re here to help you become a homeowner and offer as many financing options as possible that suit your specific situation. Before high interest rates discourage you from purchasing a home, be sure to have an honest conversation with a Homeowners Licensed Mortgage Professional. An adjustable rate mortgage could be the right solution for you.

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