Homebuyers

How Much Can Homebuyers Save with an Adjustable-Rate Mortgage? It Could Be a Lot

Purchasing a home may require more money upfront than many buyers realize. You may need to kick in a down payment, pay closing costs, cover moving fees, and then get furniture, security systems, window treatments, and everything else for your new home.

But don’t panic. There are ways you may be able to save. Those hoping to ease into their mortgage payments may want to consider an adjustable-rate mortgage, also known as an ARM. These loans generally offer lower mortgage interest rates for the first years of the loan.

“You could either qualify to buy more home, or you could have a lower payment on the same home,” said Ray Williams. He is New American Funding’s executive vice president of the Consumer Direct Division.

In some cases, the more manageable monthly payments “could mean the difference between qualifying for a mortgage  or not getting approved,” he said.

How do adjustable-rate mortgages (ARMs) work?

ARMs typically offer borrowers a fixed mortgage interest rate for the first five, seven, or 10 years of a loan. These rates are typically lower than those for other types of home loans. This can save homebuyers money in the early years of their mortgages.

Then the rate adjusts every six months or a year. The loan’s rates can fall or rise, depending on current mortgage rates, up to a certain cap.

This generally results in lower monthly housing payments during the introductory period of the mortgage.

How much could you save by using an ARM to buy a home?

The savings are why Williams has used ARMs exclusively since he purchased his first home in 1995.

For example, the average mortgage rate for 30-year, fixed-rate loans was 6.43% in the week ending Oct. 3, according to the Mortgage Bankers Association. Meanwhile, the average rate for a 5/1 ARM during the same period was 5.49%. (A 5/1 ARM is loan where the rate is fixed for the first five years and then adjusts.)

Nearly a single percentage point difference may not seem like much. But it adds up to more than $200 a month for a median priced home of $417,933, assuming buyers put 20% down. (The price was as of Aug. 31, according to Zillow data.)

Within a year, those savings total $2,424. Over the first five years, you could have an additional $12,120 in your bank account.

“Oftentimes, we counsel homebuyers on what debt they should pay down before they buy a home,” said Williams. “With an ARM, we may not have to do that because they’ll have a cheaper home bill.”

Who should consider using an ARM to buy a home?

ARMs are generally good for those who don’t plan to stay in their homes past the introductory period, those who plan to refinance before the introductory period is over, and investors. Those who expect their incomes to rise may also benefit from the loans.

Most homeowners who use an ARM eventually refinance into fixed-rate loans. However, some may consider refinancing from one ARM to another if the savings are great enough.

“Why not take advantage of a lower rate during the introductory period?” said Williams.

Ray Williams NMLS # 270010