Sonoma Home Loans

Adjustable Rate Mortgage (ARMs)

Keys to a new home

Adjustable Rate Mortgage From Sonoma Home Loans.

An adjustable rate mortgage (ARM) gives home buyers a flexible option to help them save money. Many homeowners also look to ARMs as a beneficial choice for refinancing their houses. These loans come with an initial fixed rate period. At the end of the predetermined period, the interest rate can vary, depending on what the market does. Usually, rate changes occur annually, but they may change monthly with some types of ARMs.


With an ARM, you can typically choose between a 5/1, 7/1 or 10/1 loan. The first number correlates with the number of years you receive a fixed rate. The second number indicates how many times a year the interest rate can change. With a 10/1 mortgage, your interest rate remains the same for the first 10 years of your loan. Each year after that, you may see an adjustment to the rate you pay once per year. You can choose a loan that places a cap on how high your interest rate can go annually or over the loan’s life.

Pros and Cons of Adjustable Rate Mortgages.

Understanding the pros and cons of a adjustable rate mortgage loan and its financial impact will help you determine if this type of loan is right for you.

Pros

Your initial interest rate may be lower than a fixed rate mortgage.

Your rate and payment may decrease with market rates.

You can set caps on rate increases and payment limits.

Cons

Your rate may increase with market rates.

Your monthly payment may increase.

Payment caps may lead to negative amortization, which is when payments aren't covering interest on the loan.

Adjustable Rate Mortgage Eligibility Requirements.

With an adjustable rate home loan, you need to have a qualifying credit score. To determine if you are eligible for an ARM, you can prequalify for the loan. Prequalification reduces the stress of waiting on approval during the closing process. You also know how much house you can afford. With these mortgages, the standard loan amount abids by the conforming loan limits which changes each year.


When you opt for an ARM, it’s essential to understand the loan terms. Many home buyers find these loans attractive because they have lower interest rates for the initial fixed rate period, but they are surprised when their mortgage payment increases.

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loan specialist doing paperwork

Is a Adjustable Rate Mortgage Loan Right For You?

The interest rates on an ARM home loan are lower for the initial fixed rate period, allowing buyers to save money on their mortgages during that time. If you don’t plan to stay in your house for a long time, this may be a good option for you. Many first-time homebuyers also find the ARM attractive, as it gives them time to save some money while establishing a career or starting a family.


The flexibility of an adjustable rate mortgage provides you with smaller house payments than a fixed rate mortgage at the beginning of the loan. After the fixed rate period, you may have the option to refinance your home or move into another home rather than paying the adjustable interest rate.

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