Why 30-Year ARM Mortgage Rates are So Competitive
Published May 6, 2022
Potential borrowers exploring mortgage options have likely noticed a trend: that 30-year ARM mortgage payments tend to be lower than other comparable options. Options like a 30-year fixed-rate loan and a 30-year ARM mortgage are appealing for a number of reasons. After all, with their 30-year term lengths, these loan options spread payments over the most prolonged period available in a conventional mortgage. This results in lower monthly payments.
Borrowers may have also noticed that 30-year ARM loan rates are lower than 30-year fixed interest rates. Therefore, it seemingly makes sense to go with a 30-year ARM mortgage if the rates are lower. If this is the case, why is a 30-year fixed-rate loan the most popular option selected by buyers? Let's take a closer look at these two mortgage options.
How an ARM works
An ARM, or adjustable-rate mortgage, has an initial period where the interest rate is fixed. Depending on the type of 30-year ARM loan selected, this period can last for up to 10 years. After that initial period has expired, the interest rate on the ARM will adjust. The adjustment is based on an index, which fluctuates based on market conditions. Typically, there is a set margin over the index rate that determines the loan's rate. The index rate can adjust upward or downward, and your rate will move in tandem. As a result, your mortgage payment may increase or decrease after the initial fixed-rate phase. These adjustments continue for the remainder of the 30-year term until the loan is paid off.
30-year fixed vs 30-year ARM mortgage rates: Why are they different?
The index used to calculate the interest rate for a 30-year fixed-rate mortgage is often the same as the index used for a 30-year ARM mortgage. However, the margins are usually different. The higher initial margin on the 30-year fixed-rate mortgage reflects the benefit of stability. Essentially, borrowers may be willing to pay slightly more for a stable rate and payment over the life of the loan.
The 30-year ARM mortgage rates, on the other hand, are lower than fixed-rate loans because they come with the risk of a rate escalation down the road. In some cases, the initial margin for the fixed-rate loan is higher than the margin during the adjustable period of an ARM. This, combined with market index fluctuations, exposes the borrower to the potential for a higher interest rate and mortgage payment.
That said, there are caps on the adjustments. Plus, rates can and may adjust downward and upward, depending on market conditions.
Capitalizing on low ARM interest rates
Many first-time homeowners are inclined to take advantage of the lower 30-year ARM loan rates. Doing so establishes lower monthly payments for the first several years of the loan. You may pay less in interest charges and accrue equity faster in the process. But what can you do to capitalize on the low initial rates for a 30-year ARM mortgage without exposing yourself to the possibility of a higher interest rate down the road?
A mortgage refinance is one popular option. For example, at the end of the initial fixed-rate period, you could refinance to another 30-year ARM loan to reset the fixed-rate period and keep your mortgage payment as low as possible. However, by taking out another 30-year ARM mortgage, you are resetting the payoff date to 30 years from now. If you want to pay off your mortgage debt faster, a 15-year refinance is another option.
With a 15-year refinance, you can enjoy a lower rate than what a 30-year fixed-rate mortgage offers. You might also enjoy a more manageable mortgage payment depending on the equity you've paid down. The payoff date is moved up, and your home equity will accumulate at a much faster rate. Generally, you will pay less in interest charges over the life of a 15-year loan than you would with a 30-year ARM or a fixed-rate loan.
Finding a mortgage that works for you
If you are preparing to buy your home, consider taking out a 30-year ARM mortgage today with plans for a mortgage refinance down the road. This is an excellent way to take advantage of today's low ARM rates. However, it is essential to note that you cannot predict what interest rates will do between now and when you plan to refinance. There is a chance that rates may skyrocket, which could impact your home's affordability. With options like a 15-year refinance and a 30-year ARM mortgage refinance available; however, you may have some flexibility.
Schedule an appointment with us before deciding which loan program is the best fit for your financial situation and long-term plans. Connecting with one of our dedicated mortgage consultants is a great way to weigh the pros and cons of each financing option. Then, with quotes in hand for both fixed-rate and ARM loans, you can make the right decision for your needs.