March 7, 2023
how does an adjustable rate mortgage work
How Does an Adjustable Rate Mortgage Work? Learn About ARMs
By LLCR Staff

As inflation cools and mortgage prices dip, especially in the Chicagoland area, more renters might consider becoming homeowners for the first time. This life milestone is also a financial decision that comes with many choices along the way; once you’ve worked your way through the house or condo selection process, your next step is choosing which type of mortgage you want to move forward with.

When buying a home, you have two choices for how to structure your mortgage: a fixed-rate and adjustable rate mortgage. Just as it sounds, a fixed-rate mortgage keeps your interest rate (you guessed it!) fixed for the full life of the loan. Conversely, an adjustable rate mortgage is slightly more complex, but might offer more flexibility.

What is an adjustable rate mortgage (ARM)?

An adjustable-rate mortgage features pricing that reflects benchmarks created by market conditions for at least part of the life of the loan. The life of an adjustable rate mortgage is divided into two distinct periods:

  • Fixed period: just like a fixed-rate mortgage, the fixed period of an adjustable rate mortgage is the initial loan period where your rate does not change. What differs from a fixed-rate mortgage, though, is that this rate is lower to compensate for fluctuations during the adjustment period.
  • Adjustment period: following the fixed period, your rate will either increase or decrease based on a benchmark that reflects market conditions.

During the adjustment period, the benchmark is based on a variety of factors, such as the specific type of ARM loan you opt for. According to Investopedia, this benchmark is also capped to ensure there’s a maximum amount that a buyer would pay – regardless of what happens in the market.

Comparing ARMS and fixed-rate mortgages

It’s important to consider these options carefully, as they have long-term financial implications. While fixed-rate mortgages certainly offer predictability and protection from increases in interest rates, ARMs are also worth considering, according to Rocket Mortgage, for a few reasons.

Given the recent fluctuations in the mortgage market and continued impacts of inflation, adjustable rate mortgages are becoming a popular option. ARMs are especially beneficial for first-time home-buyers who might sell their home before the adjustment period is up. This loan type also offers the benefit of lower rates for the first few years (during the fixed period), allowing buyers to reap savings during that time before transitioning to a rate that reflects market conditions.

No matter where you are on your home buying journey, our experienced and knowledgeable team at Luxury Living Chicago is here to help every step of the way. Reach out today or follow the link below to start your search!

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