Common Sen$e: The Pros and Cons of Adjustable-Rate Mortgages

ART WOOD

Igot into the mortgage business in 2005. For the most part, rates have been on the decline since that time…that is, until 2022. With the current spike in interest rates, the demand for Adjustable-Rate Mortgages (ARMs) is on the rise. As their popularity rises, I see a lot of confusion about ARMs.

The main reason a borrower would choose an ARM over a fixed-rate mortgage is because ARMs typically come with a lower interest rate. The downside to an ARM is that the rate is only fixed for a specified period, typically three to ten years. A mortgage client must weigh the risk of the rate adjusting over time versus the safety of having a fixedrate mortgage for the life of their loan. If you plan to be in your home for just a few years, then an ARM is a great solution and will save you thousands of dollars over the life of your loan.

With the carnage of the Great Recession still fresh in our minds, some people are hesitant to venture into an ARM. In 2008, there were a lot of mortgage clients who chose an ARM, but then were unable to sell their house or refinance their mortgage because they had lost most of the value of their equity. I do think those days are behind us, but still, something to consider when taking out an ARM.

The biggest question about ARMS is how they work. The typical questions are • How long is the rate fixed? • How much will it go up? • Do I have to refinance at the end of the term?

First, 99.9% of all ARMs are thirty-year mortgages, or more specifically, amortized to pay off in thirty years. The fixed-rate period is disclosed to you in the mortgage documents. Most ARMs are fixed for either three, five, seven, or ten years. At the end of that fixed-rate period, your rate will adjust. It can go up or down depending on the market. The mortgage does not have to be paid off at the end of the fixed rate period; the rate simply adjusts.

All ARMs will be characterized by three numbers that may look something like this: 2/1/5. • The first number in the sequence is the maximum the rate can rise at the end of the fixed rate term. • The second number is the maximum the rate can rise at any interval after the first adjustment. • Finally, the third number is the maximum the rate can rise over the life of the loan.

In the 2/1/5 example above, let’s say you have a five-year ARM at 5%. After the fifth year, the maximum your rate can go up is to 7%. After that first adjustment, it can only go up 1% per year for the life of the loan and can never go over 10%.

ARMs can be complicated. I am advising folks to explore longer-term ARMs right now, as I see rates coming down in the coming years. I think we will have opportunities to refinance to lower rates, so may as well take the lower rate until that time.

There are multiple mortgage options available, and there is not a one-size-fits-all solution. You are best served to consult a mortgage professional to help you better understand the terms of the loan you are getting.

ART WOOD (NMLS #118234) is the branch manager of The Art Wood Mortgage Team of Goldwater Bank, located at 2341 Main Street in downtown Tucker. “Tucker’s Mortgage Guy” for sixteen years, he is a former Tucker Tiger (Class of ’92), and co-founder and organizer of Taste of Tucker. Family guy, community guy, and definitely not your typical mortgage guy - it’s all that he does that makes Art Wood who he is. Contact him at 678.534.5834 or art.wood@goldwaterbank.com.

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