More so than fixed-rate mortgages, the adjustable rate mortgage (ARM) loan tends to confuse Austin home buyers. So if you are buying real estate in Austin and are considering the different types of mortgages available to you, it’s wise to understand how these adjustable rate loans work.
The ARM loan is popular with Austin home buyers who want a lower interest rate during the first few years of home ownership. Why is the ARM loan popular in this regard? Because Austin adjustable rate mortgages are structured to allow for lower interest rates during the initial period of the loan’s term (lower than the interest rate on a fixed-rate mortgage, that is).
How the Adjustable Rate Mortgage Works
Most ARM loans are 30-year mortgages. For the initial portion of the mortgage, the borrower will pay a fixed interest rate on the loan. This initial period for adjustable rate mortgages is usually 3, 5 or 7 years, and it can vary from one Austin mortgage lender to the next.
During the initial 3, 5 or 7 years, the borrower / homeowner will enjoy the benefits of a fixed rate, which means that he or she will know what the payments will be each month. This payment will normally be lower than if the borrower chose a regular fixed-rate mortgage — because remember, the ARM loan usually starts off with an appealingly low interest rate during the initial phase.
This is why many Austin home buyers choose the ARM loan in the first place. It keeps the mortgage payment lower by reducing the interest rate. But it doesn’t stay that way forever!
When the ARM Loan Adjusts
After the initial period ends, the adjustable rate mortgage adjusts (or “resets”) to a different interest rate. Austin mortgage lenders will use their own formula to determine your new interest rate, once the ARM loan adjusts. Normally, the new / adjusted interest rate on the loan will be based on the prime rate at the time of adjustment (which, of course, you never know in advance).
Refinancing Prior to Adjustment
Many Austin homeowners who choose the ARM loan option will later have concerns about the interest rate rising, so they will often try to refinance the mortgage loan prior to the adjustment period. By refinancing the mortgage to a fixed-rate option, these homeowners can avoid the uncertainty of the adjustment phase.
Other ARM Considerations
When considering an adjustable rate mortgage, you will want to pay careful attention to the fixed-rate portion of the loan. Also find out what, if any, caps there are on the adjustable portion of the loan. Ask your loan officer those questions so you can make an educated decision.
Is an Austin adjustable rate mortgage right for you? Only you can answer this question. But it will help you to know why homeowners choose this loan to begin with. The most common reason, as we have discussed, is that the borrower / home buyer does not expect to live in the home beyond the fixed-rate period of the loan. In this case, they can benefit from the lower interest rates up front without the uncertainty of the adjustable period.
An informed consumer is a smart consumer. Doing your homework in advance will help you understand the Austin mortgage options available to you, and thus make the right financial decision regarding your home purchase.
