Adjustable Rate Mortgages
An Adjustable Rate Mortgage (ARM) can be a smart choice for homeowners looking for flexibility and potential monthly savings. With lower initial rates, ARMs can make homeownership more affordable, allowing you to maximize your budget. If you plan to move within five years, an ARM may offer a pathway to greater financial freedom, making it an appealing option for your home-buying journey.
How Are Adjustable Rates Calculated?
Homebuyers with an adjustable rate mortgage (ARM) can take advantage of an “introductory” lower interest rate than that of a fixed rate loan. The loan proceeds at this rate for an agreed-upon period of time. Once that introductory period expires, the interest rate change will “reset” – moving up or down in line with the movement of an “index” (major interest rate). Following this movement, you may have a lower interest rate or a higher interest rate on your mortgage loan.
Hybrid ARMs are signified by the fractions in their titles – 3/6, 5/6, 7/6, 10/6. The first digit tells you the number of years with the introductory rate adjustment. The second digit reveals the length of the adjustment period once it becomes a variable rate. For instance, on a 5/6 rate, the first reset takes place after five years. The next reset can take place six months later, and every six months after that, until the end of the loan term.
Benefits of an Adjustable Rate Mortgage:
An adjustable-rate mortgage is an alternative to a fixed-rate mortgage loan. This loan type is an option for borrowers who would like to take advantage of a lower rate while they are living in the home. Typical benefits of an adjustable rate mortgage include:
Lower Initial Interest Rate
Lower Initial Monthly Mortgage Payment
Possible to Pay Less in Return, in Favorable Market Conditions
Lower Initial Interest Rate
Who Qualifies for an Adjustable-Rate Mortgage?
There are a number of borrowers well suited to a St. Louis adjustable rate mortgage. This loan is a particularly good option if you think you, as a borrower, will move during the introductory period – a starter home, a short-term job transfer, and so on. This will allow you to capitalize on the low initial rate and a lower monthly payment without the potential long-term adjustments. Successful adjustable rate mortgage applicants typically have some of the following characteristics:
- An income that can handle the maximum rate and monthly payment
- Steady upward movement of income reasonably expected over the coming years
- A low debt load that would not interfere with payments
- Short-term ownership
Changes to St. Louis adjustable rate mortgages protect borrowers who take this option. These home loans have an adjustment cap and a lifetime cap, which limit the amount that an interest rate can adjust – in one adjustment period and over the loan term, respectively. There are also a series of disclosures that the lender must make, such as maximum interest rate and payment.
FAQs
Our FAQs cover key topics such as how adjustable rates are determined and what to expect during the adjustment periods. If you have further questions or need personalized guidance, our mortgage experts are here to help.
How does the interest rate change on an ARM?
An ARM starts with a fixed interest rate for a set period. Afterward, the rate adjusts periodically based on an index and a margin, subject to caps that limit how much the rate can increase or decrease.
Who is a good candidate for an ARM?
A good candidate for an ARM is someone who plans to sell or refinance before the initial fixed-rate period ends, expects interest rates to stay low, or seeks lower initial payments compared to a fixed-rate mortgage.
Can I refinance my ARM to a fixed-rate mortgage?
Yes, you can refinance an ARM to a fixed-rate mortgage. This can help lock in a stable interest rate, especially if you want to avoid potential rate increases as the ARM adjusts. Timing depends on current rates and your financial situation.
Is there a limit to how high my interest rate can go on an ARM?
Yes, ARMs have limits on how high the interest rate can go, called rate caps. These include an initial adjustment cap, subsequent adjustment caps, and a lifetime cap, which sets the maximum interest rate over the life of the loan.
Apply for an Adjustable Rate Mortgage today.
If you’re ready to purchase a home, we offer a simple online application for a St. Louis Adjustable Rate Mortgage, or you can contact a mortgage specialist for assistance. We provide competitive rates and clear terms, and our mortgage lenders will work with you to determine if an adjustable-rate mortgage is the best fit for your needs.