Adjustable Rate Loan - Oakstar Funding

Adjustable Rate Mortgage (ARM)

Adjustable Rate Mortgages start with a fixed rate for a set period of time and then have a variable interest rate over the remaining life of the loan. They are appealing to borrowers because they offer initial rates lower than those available for a fixed-rate mortgage. An ARM is worth considering if you do not plan to stay in your home long term and are likely to sell or refinance before the initial fixed period expires.

What is an adjustable-rate mortgage (ARM) loan?

An Adjustable Rate Mortgage (ARM), also known as a variable rate mortgage, is a home loan with an initial fixed rate that will change into an adjustable interest rate after the initial fixed period has expired. At each adjustment period, your payment can go up or down based on market rates.

The most popular adjustable rate mortgage is a 5/1 ARM. In this case, the initial rate lasts for 5 years, and after that your rate can change once each year for the remainder of your loan. Traditional ARMs have an initial period of 3, 5, 7, or 10 years.

While your rate will change with each adjustment, there are caps in place to protect borrowers from seeing drastic swings in their interest rates.

How Will My Rate Change with an Adjustable Rate Mortgage?

Your loan contract will state which benchmark will be used as a basis for your new rate at each adjustment period. Your loan contact also specifies your rate caps. Caps are the limit on the amount the interest rate can increase or decrease with each adjustment period and the amount the rate can change over the life of the loan. If you’re considering an adjustable rate mortgage, be sure to understand your loan’s benchmark and cap terms.

Considerations for an Adjustable Rate Mortgage:

Short-Term Gains

Adjustable-rate Mortgages typically feature lower interest rates and Annual Percentage Rates (APRs) during the initial fixed rate period than comparable fixed-rate mortgages. These lower rates lead to lower monthly payments.

ARMs Are Complex

An adjustable-rate mortgage can be a great tool if you understand how to use it. Anyone considering an ARM needs to make sure they understand the intricacies of how their loan can change over time.

ARM home loan requirements and qualifications:

Loan amount – The 2022 loan limit for a conforming mortgage for all Texas counties is $647,200 for a single-family home. Jumbo ARMs are available as well for those who need a larger loan amount.
Down payment – Most adjustable-rate mortgages require a minimum down payment of 5%, if you are looking for a loan option with a lower down payment requirement consider an FHA or VA loan.
Credit – Adjustable rate loans typically require a minimum FICO score of 620 and a Debt to Income Ratio of no more than 50%. If you have a high DTI it may be easier to qualify for an ARM since the initial monthly payment is lower.
ARM Terms – Most ARM terms are 1, 3,5,7 or 10 year. If you are thinking about an arm that is 7 years or under, under conventional guidelines the lenders will need to qualify you at 2% higher than your initial ARM rate.

As interest rates have risen in 2022, ARMs are becoming a popular way to get a lower introductory rate. The OakStar team can walk you through your options for a fixed-rate and adjustable-rate mortgage so you can decide which loan product is right for you.