The answer is threefold:
- Because the initial interest rate and monthly mortgage payment for an ARM during the fixed rate period is typically lower than the interest rate and monthly payment for a fixed rate mortgage.
- Because an ARM loan with a rate fixed for 7 years may qualify you for a larger loan amount.*
- You think interest rates will decline significantly in the future.
ARMs typically have a fixed interest rate for a set period of time, which is usually the first 3, 5, 7 or 10 years of the mortgage. It then converts into an annual ARM for the remainder of the mortgage term.
If you know that you are only going to own the property during the fixed rate period then an ARM may be the right program for you. This way you benefit from the lower monthly mortgage payment during the fixed rate period but you are not exposed to a potential increase in interest rate and monthly mortgage payment during the adjustable rate period.
*Since the “start rate” on a 7 year ARM is usually lower than a 30 year fixed it will qualify the borrower for a larger loan amount. A 3 or 5 year ARM is qualified at the start rate + 2% which is usually a higher rate than a 30-year fixed.
For an analysis of your current ARM, or if you have any questions, call Jean 310-429-8070.