We’ve talked about the different types of mortgage loans that are available to California homeowners in the past. Today, we’re going to focus on one specific financing option, and that is the adjustable-rate mortgage, or ARM.
This type of home loan can be advantageous in certain situations. But it’s not for everyone. Keep reading to learn when it makes sense to use an adjustable-rate mortgage to buy a house in California.
What Is an Adjustable-Rate Mortgage?
Unlike a fixed-rate mortgage loan, which carries the same interest rate for the entire repayment term, an adjustable / ARM loan has a rate that changes over time. There are different types of ARMs. These days, most of them combine features of a fixed and adjustable-rate mortgage, and these are referred to as “hybrid” loans.
The 5/1 adjustable-rate mortgage is one of the most popular ARM options among home buyers in California. This is a hybrid loan that starts off with a fixed interest rate for the first five years. After that initial phase, the interest rate will begin to change every one year. That’s what the two numbers signify in the label.
A 7/1 ARM loan behaves similarly, but it has a fixed interest rate for the first seven years. After that, the rate will change annually, just like with the 5/1 adjustable mortgage.
Benefits of Buying a Home in California With an ARM
You might wonder why a home buyer would choose this type of California mortgage option. Why would anyone want a loan with an interest rate that could change over time? The answer lies within the initial savings.
On average, adjustable-rate mortgage loans tend to start off with lower interest rates than their fixed-rate counterparts. So a California home buyer could potentially save money during the first few years of homeownership, by using an ARM loan to buy a house.
Of course, there is the uncertainty of a changing interest rate down the road. But for some borrowers, the money saved during the first few years is enough to offset the unpredictability of a changing rate later on. In other words, the pros outweigh the cons.
Many borrowers who use an adjustable-rate loan do so because they are planning to either sell or refinance the home after a few years.
For example, California military members who tend to rotate around every few years could benefit from using an ARM loan to buy a house. Someone who is stationed in a particular area for, say, 3 to 5 years could use an adjustable-rate mortgage to save money during those years. They could get a lower rate than a fixed loan would offer, and then sell the home and move before the mortgage starts to adjust.
That’s just one example of a scenario where it might make sense to use an ARM loan. The important thing is to understand how this kind of mortgage works.
There are advantages and disadvantages to all of the different types of home loans. As a California home buyer, you want to choose the best financing option for your particular situation. It might be an ARM loan. Or it might be the more popular 30-year fixed-rate mortgage. It depends on the situation and your financial goals.