ARMs in Norfolk and The Hampton Roads

As you prepare to buy a home in Norfolk and the Hampton Roads, choosing the mortgage option that is best fit for your unique needs is key. As you go through the essential process of comparing your financing options, consider an Adjustable Rate Mortgage (ARM). As with all mortgage types, there are pros and cons to this type of funding that make it the ideal choice for some buyers and not for others. 

We are here to help you successfully walk through the buying process as you search for your new home. Keep reading to learn more about ARMs, and contact us any time with your home buying questions. 

What is an ARM?

An Adjustable Rate Mortgage (ARM) is a type of home loan where the interest rate can change periodically, usually in relation to an underlying financial index or benchmark. Unlike fixed-rate mortgages, where the interest rate remains constant for the entire loan term, ARMs have variable rates that can fluctuate.

Most ARMs start with an initial fixed-rate period during which the interest rate remains constant. This period is typically set for a specific number of years, such as 3, 5, 7, or 10 years. For example, a 5/1 ARM means that the initial fixed-rate period will last for five years, and after that, the rate can adjust annually.

What are the benefits of buying a home with an ARM?

Choosing to go with an ARM comes with a list of potential benefits that can work in a buyers favor. 

Lower Initial Rates

The initial appeal of an ARM is the lower interest rate. As you compare mortgage options, the interest rate of an ARM is almost certain to be substantially lower than a conventional or FHA mortgage. This translates into a significantly lower monthly payment or even the opportunity to opt for a 15-year loan instated of a 30-year. 

Lower Overall Interest Costs

While it is not guaranteed, an ARM does have the potential to mean less money spent in interest over the life of the loan. If interest rates remain stable or decrease over time, borrowers with ARMs may benefit from lower total interest costs compared to fixed-rate mortgages.

Short-Term Homeownership Plans

ARMs can be ideal for borrowers who plan to own a home for a relatively short period, especially during the initial fixed-rate period. For example, if you are a military member buying a home in Norfolk because you are stationed her for just a few years, an ARM might be the perfect fit. 

Are there risks associated with buying a home with an ARM?

There are also some potential risks associated with choosing an ARM. 

Interest Rate Volatility

No matter who you ask in the real estate or mortgage world, no one can tell you what mortgage rates are going to do in the next few years. Educated predictions can be helpful, but no one can give you a guarantee. Because of this, ARMs expose borrowers to interest rate risk, as rates can rise, leading to higher monthly payments.

Long Term Ownership Plans

Because of the inherent unpredictability of an ARM, it may not be the right fit for buyers who plan to own the home for many years. Borrowers may face uncertainty about future payments, making budgeting and planning for the future more challenging, especially if rates increase.

How much can the rate change with an ARM?

The interest rate on an ARM is tied to a specific financial index, set by the U.S. Treasury Bill rate. Mortgage lenders add a margin to that rate, a fixed percentage that is added to the index rate to determine the borrower's interest rate. The amount your rate can change will be set by your lender, so it is essential to compare the terms of your ARM among multiple lenders before choosing one.

To protect borrowers from significant interest rate increases, ARMs often have caps that limit how much the interest rate can change during a specific period (adjustment period or over the life of the loan).

What is the adjustment period?

As you look into using an ARM, you will see the term adjustment period. After the initial fixed-rate period, the interest rate on an ARM can adjust periodically. The frequency of adjustments is known as the adjustment period. It is common to see an adjustment period of 1, 3, 5, 7, or 10 years, but they can vary beyond those numbers. 

Adjustable Rate Mortgages can be a viable option for certain borrowers, especially those who plan to sell or refinance before the end of the initial fixed-rate period. However, it's essential for borrowers to carefully consider their financial situation, risk tolerance, and long-term homeownership plans before opting for an ARM.  

Ready to learn more about buying a home in Norfolk? Contact us any time.

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