Why an Adjustable Rate Mortgage (ARM) Could Make Sense in Today’s Housing Market

A couple meeting with a mortgage advisor

Mortgages and homebuying can often be complicated, and times of abnormally high inflation can cause even more confusion. In the current post-pandemic housing market, interest rates are significantly higher than they were a few years ago and inventory of homes is still low in many neighborhoods. According to Redfin, the number of homes for sale in Pennsylvania during the month of August 2023 was down 18.9% year over year.

The buyers who were able to purchase a home when rates were lower may be hanging on to their smaller payments and putting off the search for their next home until the market becomes more favorable – which means current buyers are left to compete for fewer listings.

If you do find a house you love, your next step may be selecting the right mortgage. In addition to specialty mortgages like FHA loans and VA loans, you can also choose between traditional, fixed-rate mortgages vs. Adjustable Rate Mortgages (ARMs).

What’s the Difference Between a Fixed rate and Adjustable Rate Mortgage?

A fixed-rate mortgage is often considered to be a traditional mortgage with options to choose between 10,15, 20, or 30-year terms. The interest rate is determined when you apply, and that rate remains unchanged for the life of the loan.

An Adjustable Rate Mortgage, on the other hand, is structured to provide lower payments upfront with a fixed rate for the first few years. Then, the rate is adjusted each following year based on national mortgage rate trends. At Citadel, you can choose either 7- or 10-year terms upfront, and interest rates can either go up or down after the initial set term. However, your rate can never increase or decrease more than 2% per year and can never be higher than 5% over your initial rate. See Citadel's full product details here

learn and plan

Considering your options? Check out Citadel’s mortgages and current rates.

For sale sign on a house

When to Consider an Adjustable Rate Mortgage

Traditionally, fixed-rate mortgages are often said to be the best choice if you plan on living in the home for the next fifteen to thirty years and want the same principal and interest payment throughout the life of the loan. Alternatively, an ARM is traditionally considered to be the best option for those who aren’t planning to live in their new home for more than 10 years, or if their budget could benefit from lower payments upfront assuming significant income increases over time. But as we all know, the last few years brought out some major shifts in both the economy and the way people are making decisions.

During the height of the COVID-19 pandemic, interest rates were at historic lows, so most buyers at that time likely benefitted greatly from locking in a low, fixed rate for the life of their loan. They should likely make it through the current inflation period without experiencing an increase in their monthly payments.

However, if you’re searching for a new home when rates are higher than normal and expected to decrease over time, it may be the right time to consider an ARM. The initial fixed rate is typically lower than a traditional mortgage, and you may see an even further decrease in your rate and monthly payment once the annual adjustment period begins (without having to refinance or take out a new loan). Plus, at Citadel you can prepay at any time without penalty to shorten the term of your mortgage.

Other Options to Consider

Of course, there are always other options to consider if the current housing market doesn’t feel like the right fit for your financial needs and goals. Many Americans are choosing to rent vs. buying a house, and others are choosing to live with family or other roommates to share costs.

Citadel’s Mortgage Loan Advisors are experienced local consultants who can answer all your questions and talk through your options to help decide what might work best for you. Get in touch with them whenever you want to discuss!

See more tips for staying resilient during economic uncertainty.

Read Article