If you are currently in the market for a mortgage in Boston or elsewhere in Massachusetts, you might be thinking about taking out an adjustable rate mortgage (ARM).
In this post, we are going to share some of the advantages of adjustable rate mortgages and talk about loan scenarios where they may be an ideal choice.
But first, let’s talk a little bit more about the growing trend of taking out these types of home loans. We will also give a brief definition in case you are not familiar with ARMs.
What is an Adjustable Rate Mortgage?
Starting with the basics, an adjustable rate mortgage is one where the rate changes based on market rates.
Contrast this with a fixed rate mortgage, where the rate is the same for the lifetime of the loan, regardless of what is going on with market rates.
If you take out an adjustable rate mortgage, there will be an introductory period with normally a low, fixed rate.
After the introductory period is over, the rate will adjust to match market rates.
More MA Homebuyers are turning to ARMs
According to Real Estate by Boston.com & Globe.com, “In April, Massachusetts saw a 23% year-over-year increase in the number of home buyers who took out adjustable rate mortgages, data from The Warren Group indicate.”
Interest rates have been going up since March 2022, which is what has spurred the increase in homebuyers choosing adjustable rate mortgages. This trend is popular not only in Massachusetts, but throughout the US.
The above article quotes Joel Kan, the Mortgage Bankers Association vice president of economic and industry forecasting, as explaining, “More borrowers continue to utilize ARMs to combat higher rates. The share of ARMs increased to eleven percent of overall loans and to nineteen percent by dollar volume [nationwide].”
Benefits of Adjustable Rate Mortgages in Boston
If you decide to take out an adjustable rate mortgage, here are the advantages you may benefit from:
- Pay a lower interest rate. The most obvious benefit of an ARM is a lower interest rate during the introductory period. You may be able to save a significant amount of money during this time compared to the interest you would be paying if you had gone with a regular fixed rate mortgage.
- Put more money toward your principal. Some people take advantage of the lower introductory rate on an adjustable rate mortgage to put more money toward paying off the principal of their loan. That way, they may be able to pay it off faster.
- Build up savings and investments. Another option is simply to save the money that would have gone to interest. You could even invest it. The more time your investments have to grow, the more progress you may be able to make towards your wealth-building goals.
Do ARMs Have Any Disadvantages?
While the benefits of adjustable rate mortgages are appealing, you might wonder whether this type of mortgage has any drawbacks.
The main disadvantage is that if mortgage rates increase after the introductory period expires, you may be paying higher rates than you would have if you had locked in a fixed mortgage rate earlier.
Nevertheless, adjustable rate mortgages are not as risky today as some people might think based on events of the past. Borrowers today are expected to meet stricter requirements before receiving approval for an adjustable rate mortgage.
Situations Where You Might Consider an ARM
The main scenario where an adjustable rate mortgage should be considered is one where you intend to move out of the home you are purchasing right around when the introductory rate will expire, or before then.
In such a situation, the low introductory rate would help you save money, and you would not be risking paying a higher rate later. You would also have extra money that you could put towards your moving expenses.
Another situation where an adjustable rate mortgage could make sense is one where saving money on interest would help you take advantage of another opportunity. For instance, you might be trying to build a business, and are looking for a mortgage product that would help you put more funds toward doing so over the next few years.
If rates do rise in the future, you could think about refinancing your home loan. Doing so would give you the chance to switch the format of your interest rate so that your rate is fixed going forward. This would prevent it from further ballooning.
Style Mortgage Wants to Help You Choose the Right Type of Home Loan
On your own, you may not be sure whether an adjustable or fixed mortgage rate makes the most sense for your individual situation. The experts at Style Mortgage can walk you through the pros and cons for your finances now and in the future, offering you personalized guidance.
To get answers to your questions and apply for an affordable mortgage now, please give us a call at (508) 223-5206. We work with homebuyers and homeowners in Massachusetts, Rhode Island and Connecticut.
This information is intended for informational purposes only and is not an offer to lend. All applications are subject to credit approval.