A First-Time Buyer’s Guide to Adjustable-Rate Mortgages (ARMs)

Understanding Adjustable-Rate Mortgages (ARMs)

Adjustable-rate mortgages (ARMs) are gaining popularity as fixed mortgage rates remain high. For first-time homebuyers, an ARM could provide lower initial payments, making homeownership more affordable.

Between 2019 and 2022, ARMs were rarely used because fixed mortgage rates were historically low. But with fixed rates exceeding 7% in late 2023, more buyers are reconsidering ARMs as a cost-saving option.

Here’s what you need to know before choosing an adjustable-rate mortgage as a first-time homebuyer.

How Much Can You Save With an ARM?

The main advantage of an ARM is that you pay lower interest rates during the initial fixed period. The savings depend on your loan amount and the difference between fixed and adjustable rates.

For example, if current 30-year fixed rates are 7% and a 5-year ARM is available at 5.5%, here’s what the estimated savings could look like:

• $200,000 loan → Save $195 per month

• $300,000 loan → Save $293 per month

• $450,000 loan → Save $439 per month

• $600,000 loan → Save $585 per month

For larger home loans, an ARM can provide significant savings, allowing first-time buyers to afford a more expensive home or lower monthly payments.

How Do ARMs Work?

Unlike fixed-rate mortgages, ARMs have two phases:

✔ Initial Fixed Period: The loan starts with a fixed interest rate for 3, 5, 7, or 10 years. ✔ Adjustment Period: After the fixed term, the rate adjusts annually based on market rates.

ARM Protections for Borrowers

Modern ARMs are safer than those that contributed to the 2008 housing crisis. They come with rate caps that limit how much your rate can increase.

Typical ARM caps include:

• Initial Adjustment Cap – Limits how much the rate can increase at the first adjustment.

• Subsequent Adjustment Cap – Controls how much the rate can increase annually.

• Lifetime Adjustment Cap – Limits the total rate increase over the loan’s lifetime.

For example, a 5/1 ARM with a 5/2/5 cap means: ✔ The rate won’t increase more than 5% in the first adjustment year. ✔ Future annual adjustments are limited to 2%. ✔ The total increase cannot exceed 5% above the initial rate.

These protections help prevent rapid spikes in mortgage payments.

Who Should Consider an ARM?

An ARM could be a great option for first-time buyers who: ✔ Plan to sell or move within 5-10 years. ✔ Expect mortgage rates to drop and plan to refinance. ✔ Need lower initial payments to qualify for a larger home. ✔ Anticipate higher future income (e.g., promotions, bonuses, inheritance).

If you plan to keep your home for 10+ years, a fixed-rate mortgage might be safer in case interest rates rise significantly in the future.

Finding the Best ARM Lender

Not all lenders offer ARMs, so finding a good ARM lender requires research. The best sources for ARMs include:

✔ National banks – Offer competitive ARM rates. ✔ Local credit unions – Provide lower-than-market ARM rates. ✔ Mortgage brokers – Have access to multiple lenders. ✔ Personal bankers – May offer special ARM discounts for clients.

For example, some lenders offer 5-year ARMs in the mid-5% range, while credit unions provide 10-year ARMs close to 6%. Comparing lenders can help first-time buyers lock in the best possible rate.

Final Thoughts: Is an ARM Right for You?

Adjustable-rate mortgages aren’t for everyone, but for first-time buyers who plan to move or refinance within 10 years, an ARM could mean significant savings.

✔ Lower initial interest rates help you afford a home now. ✔ Rate caps limit risk and provide financial protections. ✔ Smart timing allows you to refinance if interest rates drop.

Before choosing an ARM, compare loan terms, caps, and adjustment schedules with different lenders to ensure it aligns with your financial goals.