Prospective homebuyers are dealing with higher home prices, tightening inventory, and rising interest rates across our region and the country. Economic factors, such as supply and demand and inflation, influence interest rates for lenders and borrowers. Currently, rates have been consistently rising, causing some concern for homebuyers. If you are looking for a solution for the high rates, adjustable-rate loans could offer a lower interest rate on your mortgage.
When interest rates are low, buyers usually take out a fixed-rate mortgage loan. A fixed-rate mortgage loan is where the rate is fixed at the introductory rate for the entirety of the loan. But when the introductory rate isn’t as appealing, a second option is an adjustable-rate mortgage (ARM). With an ARM loan, the rate changes throughout the life of the loan.
There are different ARM options depending on the length of the introductory period. For example, a 5/1 ARM locks in an introductory period of five years with a lower rate and then the rate can change every year depending on the status of the economy. Most ARMs have interest rate safeguards in place called caps. You will typically see an interest rate cap for each adjustment period and a total interest rate cap that cannot be exceeded over the term of the loan.
A major benefit of ARMs during a high interest rate period is they generally have lower rates and monthly payments compared to fixed-rate loans during the introductory phase. Currently, 30-year mortgages are the highest they have been since 2008. Because of this, the Mortgage Bankers Association reports 1 in 10 homebuyers are opting for an ARM over a fixed-rate mortgage. Security Financial Bank (SFB) is seeing similar results in its local markets here in Western Wisconsin.
There is risk in ARMs, however. There is an uncertainty in what the future rates will be after the introductory period and rates could potentially rise. Refinancing your mortgage loan may be possible if fixed rates become lower. Although you will not have to worry about prepayment penalties with SFB, be sure to ask if a prepayment penalty will apply with other lenders. SFB’s mortgage bankers like to remind customers you marry the house, but you can date the rate. It is important for homebuyers to meet with a mortgage banker to discuss all possibilities. The banker will consider all options and help find the best fit throughout the life of the loan.
Wendy Hollenbeck is a mortgage banker with Security Financial Bank. The Chippewa Valley Home Builders Association is a free resource available to all homeowners building or remodeling a home. For more information, please call 715-835-2526 or email email@example.com.