Adjustable-Rate Mortgage in Chicago, IL
An adjustable-rate mortgage (ARM) is a type of home loan where the interest rate can change over the life of the loan based on specific benchmarks or indices. This means that the monthly principal and interest payments can fluctuate, depending on the prevailing market conditions. The potential variability of an ARM contrasts with fixed-rate mortgages, where the interest rate remains constant. ARMs usually come with an initial period where the interest rate is fixed, followed by periodic adjustments. While the starting rate of an ARM might be lower than that of a fixed-rate mortgage, it’s important to note that the rate can increase, possibly making future payments higher. Many homeowners opt for ARMs because of the lower initial rate, but they should be prepared for potential changes in their monthly payments.
How adjustable-rate mortgages work
Mortgage rates can vary frequently due to a range of influences. For example, today you might see a 4.5 percent interest rate, and tomorrow it could be 5 percent. With adjustable-rate mortgages, your rate can change after the initial fixed period based on specific market indices. While this allows for potentially lower initial rates, it also introduces variability in future payments.
Unlike fixed-rate mortgages, which keep the interest rate constant, ARMs adjust the interest based on prevailing market situations.
For an ARM, your monthly payment can change over time. During the initial fixed period, your payment will remain consistent. However, once the adjustment period begins, your monthly payment can increase or decrease depending on the current interest rates.
Consider this scenario: You buy a home valued at $450,000 and make a down payment of 20 percent. This gives you a loan of $360,000. If you choose a 5/1 ARM with an initial rate of 4.5 percent, your monthly contribution towards the principal and interest (excluding insurance and taxes) would be set for the first five years. After that, it might adjust annually based on the prevailing market rate.
During the initial phase, a significant part of your total payment might go towards the interest, but as with all mortgages, the balance between principal and interest shifts over time.
Pros of an Adjustable-Rate Mortgage
One of the primary advantages of an ARM is the potential for a lower initial interest rate compared to fixed-rate mortgages. This could mean lower monthly payments at the start of the loan. ARMs can be advantageous for those who plan to sell or refinance before the adjustable period kicks in. For people who can handle fluctuations in their monthly payments, ARMs can sometimes offer long-term value, especially if interest rates remain stable or decline. Being tied to market conditions, if interest rates drop, ARM holders might benefit without refinancing. This offers a degree of flexibility that fixed-rate mortgages don’t.
- Lower Initial Rates
- Potential for Lower Total Interest Paid
- Flexibility
- Potential to Benefit from Decreased Rates
- Short-Term Savings
Cons of Adjustable-Rate Mortgage
The primary drawback of an ARM is the unpredictability it introduces. If interest rates rise significantly, your monthly payment could also see a considerable increase. ARMs can be more complicated than fixed-rate mortgages, making them potentially confusing for some borrowers. For long-term homeowners, there’s a risk that the rate (and payment) will increase significantly over time. While the initial payments might be lower, homeowners might end up paying more interest over the life of the loan if rates rise. Refinancing might be required to secure a more stable rate, leading to additional costs and hassles.
- Potential for Higher Payments
- Complexity
- Risk of Rising Interest Rates
- Potential for Higher Total Interest Paid
- Unpredictability
Your Trusted Chicagoland Mortgage Lender
Since 1909, the commitment of Mutual of Omaha remains unchanged. Whether you’re looking at an adjustable-rate mortgage or any other home financing option, Mutual of Omaha Mortgage ensures your best interests are at the forefront. Every home purchase or refinancing journey is not just a financial decision but also a step towards achieving dreams and making memories. Our priority is to understand and cater to your aspirations before delving into the intricacies of the loan. If you’re looking to buy a home or refinance in Chicago, give us a call today.