Buying a home comes with some big questions. How much can I qualify for? Will the seller accept my offer? What will the home inspection find? Can I lock in my interest rate before it goes up?
That last question can have a big impact on your home’s affordability. When you’ll be paying interest on your mortgage for the next 15 to 30 years, a single percentage point can represent thousands of dollars over the life of your loan—and that, in turn, makes a difference in your monthly payment. Since your mortgage payment is calculated to pay off interest as well as part of the principal each month, locking in a lower interest rate generally means a smaller monthly payment.
But interest rates are unpredictable, and there’s no telling when they might go up or down. Timing your home purchase to get the best rate is tricky. For homebuyers seeking a lower monthly payment, at least initially, a 5/1 adjustable rate mortgage (ARM) could be the answer.
What is a 5/1 adjustable rate mortgage?
Of the many different types of mortgages available, the 5/1 ARM is unique. While most home loans offer either a fixed or adjustable interest rate, this home loan combines both. For the first five years, your interest rate is locked—usually at a lower rate than the typical 30-year fixed-rate mortgage. After that, it readjusts every year for the rest of your loan term.
It’s a bit of a gamble. If interest rates drop after five years, your monthly payment could go down. But there’s no guarantee they won’t take a big jump instead, causing your mortgage payment to soar. The potential fluctuations can make it difficult to budget and plan for the future.
There are some protections built into this loan, however. While the yearly rate adjustments are based on a variety of factors, there’s an annual cap that keeps your rate from rising over a specific amount in a single year. There’s also a lifetime cap that determines how much your rate can rise over the life of your mortgage.
If you’re willing to take the risk, a 5/1 ARM could save you precious dollars during the first several years of your mortgage. But this type of loan isn’t necessarily for everyone.
Is a 5/1 ARM right for you?
This type of mortgage works best for homebuyers who aren’t planning on staying long in their new home. If you’re a seasoned homeowner who isn’t planning on staying long, you can use a 5/1 ARM to guarantee a lower monthly payment during your first few years, then trade up once the adjustable rate period kicks in.
In general, a 5/1 ARM might be ideal if you:
- Plan on selling or refinancing your home within five years.
- Need to build credit before getting a longer-term mortgage.
- Are looking for a mortgage that fits your budget.
Could a 5/1 ARM be the ticket to getting into your dream home? Connect with our team to learn about OCCU’s mortgage options and determine the right type of home loan for you.