With mortgage rates hovering around 7%, many homebuyers are taking a second look at adjustable-rate mortgages (ARMs). While a traditional 30-year fixed mortgage offers predictability, an ARM can provide a significantly lower initial rate and monthly payment. So, is an ARM worth considering?
The answer depends largely on how long you expect to own the home, how much lower the ARM rate is, and how comfortable you are with future payment uncertainty. The primary attraction of an ARM is the lower introductory interest rate.
For example, a buyer might compare a 30-year fixed mortgage at 7.0% with a 7/6 ARM at 6.5%. On a $600,000 loan, the approximate principal-and-interest payments would be:
- 30-year fixed at 7.0%: $3,992/month
- 7/6 ARM at 6.5%: $3,792/month
That’s nearly $200 per month in initial savings, or roughly $2400 per year. For buyers who don’t expect to stay in the home for decades, those savings may be worth considering.
An ARM makes more sense when your expected ownership period is shorter than the ARM’s initial fixed-rate period. For example, a 7/6 ARM generally has a fixed interest rate for the first seven years. After that, the rate can adjust every six months, subject to the loan’s adjustment caps. If you expect to sell the home within five or six years, you may never experience an interest-rate adjustment.
On the other hand, if this is a long-term home that you expect to own for 15 or 20 years, the future rate becomes much more important. Don’t Assume You’ll Be Able to Refinance.
One of the biggest mistakes borrowers can make with an ARM is assuming they’ll simply refinance before the rate adjusts. Perhaps rates will be lower in the future. But there is no guarantee.
Your home’s value could decline, your financial circumstances could change, or mortgage rates could remain high. A good ARM should therefore make financial sense even if you never refinance.
Before choosing one, ask the lender to show you what your payment could look like if interest rates rise substantially. Not all ARMs are structured the same way. Do your research and talk with your loan officer! Make sure you understand: Initial adjustment cap, subsequent adjustment cap, lifetime interest-rate cap, index, margin, etc. Those details can make a significant difference in your long-term costs.
With mortgage rates around 7%, ARMs deserve a place in the conversation, but they aren’t automatically a better choice than a fixed mortgage. For buyers who have a shorter expected ownership period and can comfortably handle the potential future rate changes, an ARM may provide meaningful savings. For buyers who prioritize long-term payment certainty, a fixed-rate mortgage may provide greater predictability.
The best approach is to compare both options using your actual purchase price, down payment, and expected time in the home—not just the advertised interest rate.
