Should I Get an Adjustable Rate Mortgage to Buy a Home in Santa Clara?

It might surprise you to learn that houses in the United States now cost over $350,000 on average. So, it’s become more difficult than ever before for homebuyers to find a place of their own. Those who currently own property, though, will likely find that their home is worth exponentially more than what they purchased it for.

For those who are looking to purchase a home, taking advantage of an adjustable rate mortgage can be a great way to secure financing. Not all buyers understand the details of this opportunity, though.

The good news is that it’s not as complicated as it may seem at first.

To help you get started with an adjustable mortgage, we’ve created this guide that can help you avoid common mistakes. Let’s dive into everything you need to consider about this type of mortgage payment.

So, What Is an Adjustable Rate Mortgage?

An adjustable rate mortgage, also known as an ARM, is a type of mortgage where the interest rate can change over time.

This means that your monthly payments could go up or down depending on market conditions. As you might guess, this can make budgeting for your mortgage a bit more challenging.

What Do the ARM Numbers Mean?

You may have noticed that our loans include two numbers.

For example, you might see one that says “5/1”. This means that the interest rate will stay the same for five years and then can adjust once per year after that.

The first number (5) is how long the initial interest rate period lasts. The second number (1) indicates how often the interest rate can adjust after the initial period.

Why Would I Want an Adjustable Rate Mortgage?

There are a couple of reasons why you might want to consider an adjustable rate mortgage. First, the initial interest rate is often lower than a fixed-rate mortgage.

This means that your monthly payments could be lower during the first few years of your loan. Second, if market conditions are favorable, your interest rate could go down after the initial period. This could save you money over the life of your loan.

How Do ARMs Work in Context?

If you’re considering an ARM, it’s important to understand how they work and what the potential risks are.

This will help you make the decision that’s right for you. Here are a few things to keep in mind.

1. The Interest Rate Is Not Fixed

As we mentioned, the biggest risk with an ARM is that the interest rate can change. This means that your monthly payments could go up or down, making it difficult to budget for your mortgage. However, strong changes in the interest rate of ARM loans are uncommon.

2. There Is a Limit to How Much the Interest Rate Can Increase

Most ARMs have caps, which limit how much the interest rate can increase over the life of the loan. For example, a 5/1 ARM with a 2% cap would mean that the interest rate could not increase more than 2% after the first five years.

This helps protect buyers from becoming unable to handle their mortgage payments.

3. ARMs Typically Have Lower Introductory Rates

One of the biggest benefits of an ARM is that they often have lower introductory rates. This can save you money in the short term, but it’s important to remember that the interest rate will eventually adjust.

How the interest rate changes will depend on market conditions.

4. ARMs Can Be a Good Option For Certain Borrowers

Despite the potential risks, ARMs can be a good option for certain borrowers. If you’re planning on moving or refinancing within a few years, an ARM could save you money.

Just be sure to understand the risks and compare different ARMs before you decide.

5. You May Have to Pay a Higher Interest Rate if You Refinance

If you decide to refinance your mortgage, you may have to pay a higher interest rate. This is because the new loan will be based on the current market conditions, not the rates when you first got your mortgage. Unfortunately, this means that you could end up paying more in the long run even if you had a low interest rate when you got your loan.

What Are the Different Types of ARMs?

There are three primary types of ARMs that you need to know about before moving forward. Each has its own advantages and disadvantages.

Let’s take a brief look at them below.

5-Year ARM

The most common type of ARM, the 5-year ARM has a fixed interest rate for the first five years.

After that, the interest rate will adjust annually. In general, the 5-year ARM offers a lower interest rate than a 30-year fixed-rate mortgage.

However, it’s important to remember that your monthly payments could increase after the initial five years. This is why it’s important to understand how much your payments could increase before you decide on a 5-year ARM.

7-Year ARM

A 7-year ARM is similar to a 5-year ARM, but the interest rate is fixed for seven years. This can be a good option for borrowers who want a longer period of stability. It’s worth noting that the interest rate for a seven-year ARM loan lies somewhere between that of a 5-year and 10-year loan.

10-Year ARM

A 10-year ARM is the longest type of ARM, and it offers a fixed interest rate for ten years. This is often ideal for borrowers who plan on staying in their homes for a long time.

It also gives you the longest period of time to pay off your mortgage without worrying about an adjustable interest rate.

What About Fixed-Rate Mortgages vs ARMs?

If you’re trying to decide between an ARM and a fixed-rate mortgage, there are a few things to consider.

First, ask yourself how long you plan on staying in your home. If you’re planning on moving within a few years, an ARM could save you money.

However, if you plan on staying in your home for the long haul, a fixed-rate mortgage might be the better option. It’s also essential to consider your budget.

If you’re comfortable with the idea of your payments going up or down, an ARM could make sense. However, if you need to stick to a strict budget, a fixed-rate mortgage will give you more peace of mind.

It’s important to compare different ARMs and fixed-rate mortgages before making a decision. Be sure to look at the interest rates, fees, and other terms before you choose a loan.

Failure to do so could put you in an adverse financial situation.

Have Adjustable-Rate Mortgages Always Been Popular?

Interestingly, many people are unaware of the fact that adjustable-rate mortgages have only recently come back into popularity. The last time they were a favorable loan option was during the financial crash of 2008.

This is due to the fact that mortgage interest rates were notably low, allowing people to secure low monthly payments. Unfortunately, interest rates rose in the following years, which caused many people to become unable to pay for their mortgages. For this reason, ARMs have a mixed reputation.

* Total commission 4% including buyer side agent commission of 2.5%, offer varies by value of home.

Is It True That ARMs Have Stronger Guidelines Now?

Yes, this is absolutely true.

In the past, there were very few regulations surrounding adjustable-rate mortgages. As a result, many people ended up in difficult situations.

Now, however, there are much stronger guidelines in place. This means that people are much less likely to find themselves in financial difficulty as a result of an ARM.

For example, it is harder for borrowers to qualify for this type of loan than it was in the past. Previously, many people obtained approval for mortgages that they were not able to afford.

So, when interest rates increased, their monthly payment were far outside of their financial capabilities. Having a more rigid approval process prevents people from obtaining loans that could come back to cause issues in the future. So, although it might seem frustrating that there are stronger guidelines, it serves as a benefit to borrowers in the long run.

What Type of Person Can Benefit From Getting This Type of Loan?

There are a few different types of people who can benefit from getting an adjustable-rate mortgage.

First, if you’re someone who is planning on moving or refinancing within a few years, an ARM could save you money. If you’re comfortable with the idea of your payments going up or down, an ARM could make sense. Just be sure to understand the risks before you decide.

Those who are buying a starter home or condo can also benefit from an ARM. This is because you’re likely to move or refinance before the interest rate adjusts.

Just be sure to consider your plans for the future before you decide.

Are All Loan Providers the Same?

No, all loan providers are not the same. It’s essential to compare different lenders before you choose one.

Be sure to look at the interest rates, fees, and other terms before you make a decision. You should also take a look at their reputation. Unfortunately, there are lenders out there who do not provide the best possible client experience.

The good news is that a quick online search can often tell you everything that you need to know. Take a look at what past clients have had to say—this will offer valuable insight into what you can expect from them.

What Is the Current Real Estate Market Like in Santa Clara?

The Santa Clara real estate market is hot right now.

This means that housing prices are expected to continue to rise as time goes on. However, the market will eventually have to cool in the future.

So, homeowners with ARM loans may find that their interest rate drops in the future. Regardless, they will be able to lock an interest rate in for a certain period of time before the fluctuation begins.

Buyers in the Santa Clara market can benefit from aggressively paying off their mortgage during this fixed-rate period.

Are There Any Concerns About the Real Estate Market in Santa Clara?

There are always concerns when it comes to real estate markets.

However, the Santa Clara market has been strong for a while now and is expected to continue to be strong in the future. This means that those who are considering an adjustable-rate mortgage should not be too worried about a market crash in the near future.

Of course, as with any investment, there is always some risk involved.

Should I Get an Adjustable Rate Mortgage to Buy a Home in Santa Clara?

There are a few things to consider before deciding if an adjustable-rate mortgage is right for you.

Think about how long you plan on staying in your home. If you’re only planning on being there for a few years, an ARM loan could save you money.

Just be sure to understand the risks before you decide.

It’s also essential to take a look at recent market trends no matter what you decide to buy. Otherwise, you could run into a handful of complications.

For instance, imagine if you needed to sell your home a few years after buying it, but the market took a downward turn. You may have to sell your home for less than what you bought it for.

Our Complete Selling Solution is specifically designed to handle everything a seller needs to get their home ready for the market and achieve the highest return possible.

This Mortgage Option Doesn’t Have to Be Complicated

It might seem difficult at first to understand the nuances of an adjustable rate mortgage, but it’s easier than you might expect it to be. Ensure that you keep the above guidelines in mind so you can avoid problems you may have encountered.

Feel free to reach out to us today to learn more about how we can help you.

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Have a question?  Interested in setting an appointment to talk about your real estate plans?  Contact me today.

Santa Clara Real Estate Guy

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