Should You Consider a 5-Year Arm in Today’s Mortgage Climate?

Interest rates are moving upward. According to Lawrence Yun, Chief Economist of the National Association of Realtors, many potential home buyers may need to reevaluate their numbers to ensure they can still afford the purchase. Mr. Yun also said that considering a 5-year ARM may be an alternative to higher interest rates. Here’s what you should know.

Should You Consider a 5-Year ARM?

The main draw to a 5-year ARM is the initial low-interest rate. It typically starts about a percentage point lower than 30-year fixed-rate mortgages. This can save you thousands of dollars over the first few years of your loan. According to Bankrate, a 5-year ARM is at 3.90% today.

This works well if you only plan to be in your home for 5 years or less. However, after that initial period, your payments could increase significantly. That’s why it’s important to understand your financial limitations and have a clear budget before signing up for a 5-year ARM.

30-Year Loans Have Gotten Costly

The other big reason to consider a 5-year ARM is that 30-year mortgage rates have gotten very expensive. The average rate on a 30-year fixed-rate mortgage is 5.539%. That makes monthly payments on even a modestly priced home quite costly.

With the average price of a home in the United States going around $349,816 a 30-year, the mortgage at today’s rates would have monthly payments of almost $2,000. That same loan at the rate available on a 5-year ARM would have payments of only about $1650 per month — a significant difference.

These Are Not Common Loans

Another thing to keep in mind is that 5-year ARMs are not as common as other types of loans, so you may have fewer options when it comes to lenders.

If you’re thinking about taking out a 5-year ARM, make sure you understand the risks and benefits. Weigh your options carefully before making a decision. Speak to a financial advisor if you have more questions.

Now that you know a little more about 5-year ARMs, what do you think? Is this type of loan right for you? Let us know in the comments below.

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Tamila McDonald

Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.