Is an Adjustable Rate Mortgage ARM a Good Idea in 2022?
Is an Adjustable-Rate Mortgage ARM a Good Idea in 2022 Skip to content
Motley Fool Stock Advisor recommendations have an average return of 397%. For $79 (or just $1.52 per week), join more than 1 million members and don't miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now This increase builds in a large profit margin for the mortgage lender. Which usually means a big jump in interest rate — and in your monthly payment. The most common ARM structure, a 5/1 ARM, comes with a low initial interest rate for five years, then the rate changes every year. But rising interest rates have pushed homeownership out of reach for many Americans. After all, higher interest rates mean a higher monthly payment for the same purchase price, lifting the real cost of owning a home. While higher interest rates might push down housing market prices, this isn’t guaranteed. Meanwhile, ARMs offer interest rates often an entire percentage point lower than 30-year fixed mortgages, sometimes more. And the gap has only widened in 2022, with ARMs now offering even lower mortgage interest rates than 15-year-fixed loans according to Freddie Mac: That can put homeownership back on the table for some first-time home buyers — if they don’t mind the risks of an ARM. A one-point difference in interest rate can mean hundreds of dollars’ difference in the monthly payment. For example, a $400,000 loan costs $1,968 per month at a 4.25% interest rate, but $2,209 at a 5.25% rate.
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By G Brian Davis Date August 04, 2022FEATURED PROMOTION
With mortgage rates nearly doubling from 2021 to 2022, many homebuyers are taking a second look at adjustable-rate mortgages (ARMs). In fact, applications for ARMs have tripled since the beginning of 2022. A popular loan in the housing bubble of the mid-aughts, few borrowers have used them in recent years, given how low interest rates stayed. But skyrocketing real estate prices and interest rates have given a shot in the ARM to this once-dismissed loan. But does desperation justify this risky type of mortgage? It can — for some borrowers.Is an Adjustable-Rate Mortgage ARM a Good Idea in 2022
Adjustable-rate mortgage loans start with a fixed, low interest rate for an introductory period, usually five, seven, or 10 years. Then it starts adjusting based on market interest rates, based on a benchmark like the LIBOR or Federal Reserve funds rate.Motley Fool Stock Advisor recommendations have an average return of 397%. For $79 (or just $1.52 per week), join more than 1 million members and don't miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now This increase builds in a large profit margin for the mortgage lender. Which usually means a big jump in interest rate — and in your monthly payment. The most common ARM structure, a 5/1 ARM, comes with a low initial interest rate for five years, then the rate changes every year. But rising interest rates have pushed homeownership out of reach for many Americans. After all, higher interest rates mean a higher monthly payment for the same purchase price, lifting the real cost of owning a home. While higher interest rates might push down housing market prices, this isn’t guaranteed. Meanwhile, ARMs offer interest rates often an entire percentage point lower than 30-year fixed mortgages, sometimes more. And the gap has only widened in 2022, with ARMs now offering even lower mortgage interest rates than 15-year-fixed loans according to Freddie Mac: That can put homeownership back on the table for some first-time home buyers — if they don’t mind the risks of an ARM. A one-point difference in interest rate can mean hundreds of dollars’ difference in the monthly payment. For example, a $400,000 loan costs $1,968 per month at a 4.25% interest rate, but $2,209 at a 5.25% rate.