Advantages of Adjustable-Rate Mortgages in the Current Market
Curious about the advantages of adjustable-rate mortgages? If you’re planning to buy a new home, you may be considering an adjustable-rate mortgage instead of a fixed-rate one.
Adjustable-rate mortgages may offer certain advantages in a turbulent housing market where home buyers are looking for ways to avoid paying high interest rates. In this post, we’ll go over the pros and cons of adjustable-rate mortgages and why they’re currently seeing a surge in popularity.
What Are Adjustable-Rate Mortgages?
Adjustable-rate mortgages are a type of mortgage where the interest rate starts out fixed for a certain period of time before eventually becoming variable. The rate can fluctuate higher or lower, depending on a specific benchmark or index determined by the lender, current economic conditions, and the cost of borrowing.
Typically, adjustable-rate mortgages last for 30 years, with a fixed rate for the first seven to ten years. After that, the rate can go up or down on a yearly or monthly basis, with a cap on how much it can rise each year.
Pros and Cons
Adjustable-rate mortgages are beneficial for home buyers looking for a more affordable mortgage option over the short term.
Unlike fixed-rate mortgages, adjustable-rate mortgages start out with a lower interest rate. While that may sound like a better deal, the tradeoff is that they are less predictable once the initial fixed period ends. This can make it harder for home buyers to budget their monthly mortgage payment.
For this reason, many buyers start out with an adjustable-rate mortgage and then transition to a fixed-rate mortgage down the road.
This makes adjustable-rate mortgages perfect for home buyers who don’t plan on staying in their homes for very long. For example, those with a starter home who plan to upgrade in the near future or anyone planning to retire and move into a smaller home or retirement community.
Adjustable-rate mortgages are also beneficial because they give you the opportunity to pay more on the principal balance of your loan while the initial interest rate remains low.
The main downside to adjustable-rate mortgages is their unpredictability, which doesn’t make them a great choice for a long-term mortgage plan or for home buyers with tight budgets.
Why Are Adjustable-Rate Mortgages Making a Comeback?
Adjustable-rate mortgages are currently seeing a surge in popularity. By the end of September 2022, 12 percent of borrowers applied for an adjustable-rate mortgage, which is four times higher than at the start of the year.
The shift to this type of loan is likely due to inflation and the subsequent rise in interest rates, which are impacting the housing market for both home buyers and sellers. Currently, interest rates are up to 6.7 percent, a drastic increase from only a year ago. On top of that, the Fed may keep raising interest rates as inflation increases.
Adjustable rate mortgages are ideal for high-interest markets since the initial fixed period is a lower rate than it would be with a fixed-rate mortgage. This allows home buyers to ride out the market instability and refinance into a fixed-rate mortgage once interest rates become lower.
The sudden popularity of adjustable-rate mortgages has some people in the real estate industry concerned about the housing market’s stability. This is because a rise in adjustable rate mortgages with loose lending standards led to many homeowners foreclosing on their homes during the economic recession in 2008.
However, experts are saying there’s no cause for concern yet because the 12 percent of borrowers applying for adjustable rate mortgages is far lower than the nearly 33 percent in the run-up to 2008. In addition, stricter lending standards have been put in place, ensuring only qualified borrowers take out loans in the first place.
We Can Help You Get a Great Mortgage For Your Home
Planning to buy a new home and worried about the impact of the current housing market conditions? Working with an experienced realtor and lender is crucial to find a home and mortgage that are right for you.
At Your Home Sold Guaranteed Realty – The Nathan Clark Team, we have the experience and skills needed to help you buy a home in Rhode Island with little to no risk.
Our unique buyer’s guarantees, such as our Buyer Protection Plan, help make sure you find your dream home at an affordable price. In addition, we have a network of recommended lenders ready to help you find a mortgage that fits your needs. To learn more about working with us to buy a home in Rhode Island, give us a call at 401-288-3557 or fill out the form below for more information.