Haven't Considered an ARM? It Could Be a Game Changer in This Market

Blog posted On January 26, 2023

Spring is just around the corner, but things are already starting to heat up. Yesterday, the Mortgage Bankers Association released its weekly mortgage application survey, which showed mortgage demand increased for the third consecutive week. Purchase application submissions jumped 3% to reach the highest level since August 2022. Buyers are likely taking advantage of the recent dip in mortgage rates over the past couple months. Though rates have been trending lower than they were in October, they’re still nearly double what were last spring. Considering jumping into the market? Here’s how you can try to get a potentially lower rate.

How to get a lower mortgage rate without buying it

Adjustable-rate mortgages, or ARMs, typically grow in popularity when rates are higher. In September, when interest rates were nearing their highest level in decades, ARM applications reached the highest level in 14 years. Why? ARMs often come with lower initial rates than the traditional 30-year fixed mortgage. Unlike mortgage payment buydowns, ARMs don’t require an upfront payment to lower the rate.

What is an adjustable-rate mortgage?

An adjustable-rate mortgage is a home loan that has a fixed mortgage rate for a certain period (the initial rate), but not the entire mortgage duration. After the fixed period is over, the mortgage rate will vary based on the market rate trends. Instead of a 30-year fixed or 20-year fixed or 15-year fixed, you’ll see ARM types represented by two numbers. Common ARM types include 5/1, 5/6, 10/1, 10/6, etc. The first number is the duration the initial mortgage rate will be fixed (in years). The second number is how often the rate will change after the initial period is over (in months or years – the ‘1’ is a year while the ‘6’ is months).

= how long the initial fixed-rate period lasts (in years)

= how often the rate changes after the initial fixed period (in months)

When to consider an adjustable-rate mortgage

While adjustable-rate mortgages can offer many benefits, they’re not right for everyone. One of the obvious considerations is the post-introductory period. During this time, your mortgage rate will adjust to the market rates, which could be good (if the market rate is lower) or bad (if the market rate is higher). If the market rate is higher than your current rate, then your mortgage payment will go up. For this reason, some buyers see ARMs a risk. However, the risk can be well worth the reward if:

• You’re taking out a larger loan
• You’re not planning to live in the home for long
• You’re looking for a cheaper way to break into homeownership
• The market rates are projected to decline in coming years

If you’re taking out a larger loan, ARMs can be a good way to get a lower initial payment. If you’re not planning to live in the home for very long, ARMs have much less risk. You can get a fixed rate for 10 years with our 10/6 ARM, which oftentimes can help you break into homeownership at a cheaper cost that the traditional 30-year fixed rate. Plus, if you secure an ARM when market rates are higher or near their peak, you can secure a great deal: if they drop, you can benefit from lower monthly payments in the future without refinancing.

Benefits of a 10/6 adjustable-rate mortgage

Few lenders offer 10/6 ARMs, and we proud to be one of them! The main benefit of a 10/6 ARM is the long duration you’ll have with a fixed mortgage rate (10 years). Here’s more about why borrowers like the 10/6 ARM: 

• ARM rates are often lower than 30-year fixed-rate mortgages
• The fixed-rate period in a 10/6 ARM is longer than most other ARMs, giving the home buyer more time with a lower rate and more stability than other loans that adjust sooner
• Only a small number of homeowners have the same mortgage for over 10 years
• Could help home buyers afford higher-priced homes (if market rate is lower)

Curious in our ARM options? Let us know!

Sources: Barron’s, Mortgage News Daily, Yahoo! Finance