ARMs come with the risk of future rate increases, but today’s hybrid ARMs are typically fixed for five to seven years before they begin to adjust to market rates. Unlike during the housing boom, borrowers today must qualify based on the potential highest adjusted rate they would pay at the first rest, which is capped so it can’t rise above a certain percentage.
Buyers are drawn to ARMs because their initial rate is lower than the rate for a 30-year fixed-rate loan. For example, in a recent week, a 30-year fixed-rate mortgage averaged 4.81 percent and the average rate for a five-year ARM was 4.09 percent.
For borrowers who have a plan to pay off their loan during the fixed period or sell their property before the fixed period ends, an ARM can offer savings on the interest rate and reduced payments. ARMs are less popular with buyers and homeowners who have less certainty about their plans.
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