Fixed-Rate vs ARMs
Due to aggressive interest rate hikes by the Federal Reserve, the average 30-year fixed-mortgage rate is currently sitting at just over 7%. With rates significantly higher than last year, many buyers are looking for creative ways to secure financing. In this type of environment, some consumers opt for adjustable-rate mortgages.
Adjustable-rate mortgages (ARMs) are loans that start with a lower rate and then adjust higher over time. Taking out this type of loan can help homeowners secure lower initial monthly payments, which can be useful for budgeting purposes.
The main appeal of adjustable-rate mortgages is that they start off with a lower interest rate and monthly payment. But, the caveat is that their rate could potentially increase over time — creating more risk for the buyer. Comparatively, the interest rate on a fixed-rate loan stays the same for the entirety of the loan.
If the Federal Reserve continues to raise interest rates, then ARMs will adjust upward and homeowners can get trapped with higher payments.
Currently, the average rate for an ARM is between 6.5% and 7.21% depending on your credit score and the terms of the loan. This is roughly the same as the average rate for a fixed loan, making this money-saving mortgage less appealing to some potential borrowers.
Adjustable Risk Mortgages Still Make Sense for Some
Despite the fact ARMs aren’t working as well as some might hope, and they carry risk, they still make sense for certain buyers. This include purchasers who are planning to sell their homes before the ARM rate resets, such as in the case of house-flippers or investors.
If rates fall during the reset period, people who have ARMs could end up with a lower rate than those who are locked in a high 30-year fixed mortgage. Again, it can be considered a risky move, given rates might stay higher for longer, which would not benefit those with ARMs.
If and when the central bank does cut short-term rates, ARMs could become more popular. As always, it’s important to be strategic and understand the risks involved, particularly in the current economic climate and especially given your individual circumstances.
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