Mortgage Arms: A 2023 Solution

What Is An ARM?

Mortgage ARMS provide a lower monthly payment which helps you afford more home!  They are a super valuable tool, especially during the last 12 months which has seen both home prices and 30-year fixed mortgage rates increasing steadily.

 

These are not your grandparent’s ARMs.

ARMS today are not like the ones you heard about back during the financial crisis of 2008.  Those ARMs were made mostly to sub-prime borrowers, included pre-payment penalties and had shorter initial fixed rate periods. Not good.  Luckily, those types of ARMs no longer exist.  Today’s ARMs are made to only borrowers with good credit, have no pre-payment penalties and have much longer initial fixed rate duration.

 

How do ARMs work? 

ARMs are amortized over 30 years, but the initial interest rate is fixed for 5, 7 or 10 years, not the entire 30.  The most popular ARM today is a 7yr ARM.  What this means is that the initial interest rate is fixed and cannot change for a minimum of 7 years.   For example, as interest rates for a 30-year fixed-rate mortgage increased to 7% during the fall of 2022, the 7-year arm with a rate of 5.750% and no points became a very appealing option. 

 

Why do an ARM loan? 

Most experts are predicting that this spike in 30-year fixed interest rates will hopefully subside in the next 18-24 months.  Once interest rates do come down the idea is to refinance into a 30 or 15-year fixed rate.  Since these ARMs have no points (low cost) and no pre-payment penalty, they are set up ideally for refinancing.  If the closing costs for these ARMs were high that would lessen the appeal for sure, but they are low. Also, the 5, 7 and 10-year initial fixed rates give borrowers peace of mind that they have some time to wait for rates to come down.  

 

Of course, every situation is unique.  Please call or email me anytime for more details and today’s ARM rates and to discuss what options are the best for your future.

 

Tim McGrath

Community America | 913.706.1199  |  TMcGrath@CACU.com