Choosing the best type of mortgage in Charlotte for your home purchase is a critical decision. There are several types of mortgages to consider, each with its own advantages and disadvantages. One option you might come across is the adjustable-rate mortgage (ARM), which can be appealing due to its initially lower interest rates.
With an ARM, the interest rate can fluctuate over the lifetime of the loan, unlike a fixed-rate mortgage, which has an interest rate that remains the same throughout the entire loan term. Before the banking and housing crisis, ARMs were a popular choice. However, as interest rates rose, many homeowners found themselves facing unaffordable payments, leading to widespread financial distress.
Now, with interest rates expected to drop, ARMs may once again become a viable option for some borrowers. It’s important to weigh the potential benefits and risks of this type of mortgage in Charlotte alongside other options available to you.
The State of the Housing Market in Charlotte, NC
In the current housing market, Charlotte, NC, is likely to continue to be competitive thanks to rising home prices. The city, which is third in the nation for inbound migration thanks to the influx of new jobs, has the inventory to meet that demand. Nevertheless, as home prices increase, the need for the most affordable mortgage loan becomes even more critically important.
If you are considering a mortgage in Charlotte, think about how well an adjustable-rate loan could fit your financial needs. Before you choose one, look at both the pros and cons of these mortgages.
How Adjustable-Rate Mortgages Work
In an ARM, the amount the interest rate can adjust throughout the life of the loan depends on the movement of the index it follows. When the index rises, the cost for the bank to borrow money increases, pushing the value of the rate charged to loan holders higher.
To determine what the rate is, lenders will look at two numbers:
- Index: The index is the interest rate that fluctuates with the market’s condition. When this rate goes up, your interest rate (and your payment) increases.
- Margin: This is the number of percentage points added to the index by the lender. The margin is set within your loan contract and does not change after closing.
Your interest rate is the index rate (current market rate) plus the margin (what’s listed in your loan). Interest rate adjustments like this happen over time, according to the details of your contract.
Most loans have a set number of months at the initial low interest rate. After that period, the lender calculates a new rate. There is typically an initial cap rate, which is the most the interest rate can jump during that initial increase. There’s also a periodic cap, which is the most it can adjust within any single interval. Finally, these loans have a lifetime cap, or an upper limit to how high the rate can increase.
That initial low interest rate on an ARM is often an attractive feature, and it may encourage you to apply. Before you do, take a look at some of the pros and cons of adjustable-rate mortgage loans.
Advantages of Adjustable-Rate Mortgages
ARMs normally offer lower initial interest rates than fixed-rate mortgages, which makes them attractive to some buyers. Recent market conditions have not allowed these rates to drop significantly lower than fixed-rate loans. However, in typical market conditions, when the adjustable starting rate is at least a half-point lower than the fixed rate, it’s likely to save you money (all other factors considered).
ARMs offer other benefits, too. If you plan to remain in your home for a short period and are likely to sell before that first rate change occurs, then you may have an opportunity to keep your interest rates as low as possible. If you plan to refinance your mortgage loan within the first few months and are confident in your ability to do so, then an ARM can also work in your favor.
The other opportunity that ARMs present is the potential for a rate decrease. Because interest rates have been higher, some experts believe they could fall in the coming months or years. Utilizing an ARM with the ability to adjust lower (not all do) could mean that your monthly payments and overall interest costs will be lower. You’ll need to carefully consider the benefits and risks associated with these potential fluctuations.
Risks of Adjustable-Rate Mortgages
The biggest limitation and risk to ARMs is that they are likely to see adjustments in value over time, and more often than not, that means an upward increase. Your monthly payment could rise, and the total cost of buying the home would increase.
There’s no surefire way to know what’s going to happen in the future.
Also, note that the fact that these rates adjust can make it a bit more challenging for you to budget for monthly mortgage payments. You may find that it’s far harder to know what to expect in the coming months or years. In contrast, with a fixed-rate mortgage, the amount of your payment stays consistent over the entire life of your loan. For first-time home buyers, that consistency can prove to be valuable overall.
Considering an ARM in Charlotte’s Market?
When it comes to applying for a mortgage in Charlotte, there are many factors to consider before making your move, and the fixed-rate versus ARM decision is a big one. To make it, start by considering your local economic conditions and how they may influence your decision to choose an ARM. If you believe rates could fall in the short term and want to tap into those lower rates, then an ARM may work well for you.
Choosing an ARM takes a bit of extra attention. Choose this type of loan only if it aligns with your long-term housing plans. If you plan to sell soon, that initial low-rate introductory period can be worth it. If you have the means to pay a higher monthly payment if rates increase, then an ARM may be a good option.
If you’re a first-time home buyer, you may not be confident you know what to expect from the cost of buying and owning a home, which means you may want the confidence that comes from a fixed-rate loan instead. As a seasoned homeowner, by contrast, you probably have a good idea of how the market will treat you and what your long-term objectives in buying this home are.
Recent financial conditions have made ARMs less desirable overall. However, with rates potentially adjusting downward soon, ARMs could become desirable for those who wish to tap into that possibility. Contact TruLoan for help creating a clear mortgage plan in Charlotte that meets all your expectations.