Is an adjustable rate mortgage worth it?

Inflation steady, interest rate It is high to deal with (and may rise again) and Housing inventory Less across large parts of the country. This combination of factors creates quite a headache for both potential home buyers and current owners looking to refinance. Buyers, in particular, are stuck waiting for either rates to drop, prices to drop, or both. However, it is not clear when it will happen. It is possible that the Federal Reserve will raise interest rates again when they meet next week, marking their 11th rate hike since March 2022.

In this environment, buyers may feel that they do not have low-cost options. However, there is one type of mortgage loan that may be worth pursuing in today’s climate: the adjustable-rate mortgage An adjustable rate mortgage is exactly what its name implies. It’s a mortgage that starts at one interest rate but can — and will — be adjusted over time Unlike fixed-rate mortgages that stay the same throughout the mortgage term, adjustable-rate mortgages change periodically. But are they worth it to you? Or are you better off staying on top of today’s mortgage market? That is what we will explore below.

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Is an adjustable rate mortgage worth it?

In a traditional mortgage environment with low rates, an adjustable-rate mortgage is generally considered too risky. But with mortgage rates currently around 7% (for those with excellent credit) it may be worth doing more research. Here are three reasons why an adjustable-rate mortgage may be worth it to you now:

Interest rates are low

In today’s inflationary environment, every dollar counts — and every quarter of a percentage point helps. Although the starting rate offered with an adjustable-rate mortgage may not stay low forever, it will remain low for the first part of the loan term. And that may be all you need. According to Bankrate FYI, the national average adjustable rate mortgage as of June 9 is 6.06%. That’s more than a full point above the national average for a 30-year fixed-rate mortgage, which was 7.08% on the same date.

A full point lower rate will save you a lot of money each month — and even more in the first few years of the mortgage. While 6.06% is not as good as the rate offered a few years ago, it is still historically low and much better than what can currently be secured with a fixed rate mortgage.

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You can refinance later

Although adjustable-rate mortgages come with some unpredictability, they don’t have to stay that way forever. Once the rate environment changes — and it inevitably will — you can Refinancing In a more secure, fixed rate mortgage. The specific requirements for refinancing from an adjustable-rate mortgage to a fixed one will depend on the lender in question, but it’s not impossible to do. actually, The refinancing process will work Similar to a conventional mortgage refinance, though hopefully at a lower fixed rate.

Interest rates are limited

The word “adjustable” may conjure up thoughts of a rate that only goes up. But adjustable mortgage rates are capped, meaning they can’t go above a certain percentage regardless of what’s happening in the broader economy and rate environment. A periodic rate cap, for example, will help limit the amount that rates can change from year to year, while a lifetime rate cap will limit how much rates can rise over the entire mortgage term. A payment cap, meanwhile, will keep monthly payments per mortgage in check so that payments aren’t too onerous.

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Bottom line

Homebuyers in today’s market know how frustrating and discouraging the process can be. And while interest rates are significantly higher than they were at the height of the pandemic, they don’t need to be deal-breakers either. Adjustable-rate mortgages are a viable option to investigate. These mortgage types typically start at lower rates than their fixed rate mortgage counterparts. And they can be refinanced in the future when the broader rate environment becomes more favorable. Finally, rates on adjustable mortgages are capped, although they start low and never go above an agreed upon threshold. Check your mortgage options here now to learn more