An adjustable-rate mortgage (ARM) is a home loan with an interest rate that changes over time. New homeowners often prefer ARMs since a low initial rate period gives them more money to transition to their new homes smoothly. However, when the initial rate period ends, the interest rate will be reset to market levels based on several factors, including the loan agreement terms.
Mortgage holders in Maryland are protected by a preset maximum on their interest rates, but navigating the initial rate period can still prove challenging. If you plan to get an ARM in Maryland or want to know more about your current mortgage, continue reading this guide to initial rate periods of Maryland adjustable-rate mortgages.
What is an Adjustable-Rate Mortgage (ARM)?
An ARM is a home loan with two distinct payment periods. The “fixed” period, usually the initial period lasting 5-10 years, offers the home buyer a fixed mortgage similar to other loans. This rate is called the “introductory” or “teaser” rate since it will be adjusted after the initial period.
Depending on their situation, homeowners can take advantage of an ARM with a low initial interest rate. For example, when buyers only plan to stay in their home for 5-10 years, they can take advantage of the low initial rate before they move and pass the adjusted rate to the new owners. House flippers, military service members, and anyone who frequently moves can benefit from this situation.
Alternatively, those who plan to stay in the home for longer than the initial rate period can use the money saved on the initial rate to pay bills or moving expenses. If you are between jobs when you buy the home, you may need a lower initial rate to avoid additional personal loans.
Importantly, sellers benefit from low interest rates during the initial rate period, which can sometimes go below the buyer’s fixed rate. However, buyers benefit from low interest rates during the adjusted period. If the market changes favorably, the adjusted rate might be lower than the initial rate, but this is not usually the case.
How an ARM is Calculated
Regardless of how it compares to the adjusted rate period, navigating the initial rate period requires knowledge of how ARM rates are calculated. Home buyers in Maryland should know that the interest rate on an ARM is calculated using several important factors, including:
Index, including the United States Treasury Bills, Certificate of Deposit Indexes, 11th District Cost of Funds Index, and more- Margin, which is a fixed percentage added to the loan to assure the lender’s profit
- Adjustment Frequency or reset date, which determines how often the interest rate changes
- Initial Interest Rate, which is set by the terms of the loan until the first adjustment date and is usually less than the sum of the current index and the lender’s margin
- Interest Rate Caps, which limit the interest that buyers will pay based on the terms of their loan
Financial advisors help home buyers in Maryland determine how each factor impacts their situation. For example, a periodic adjustment cap can shift a percentage point depending on whether the loan is a one-year or sixth-month ARM. Conversely, a lifetime cap sets a percentage limit on the entire loan without adjustment, usually 5-6%.
Realizing these nuances is essential to acquiring an advantageous loan and successfully navigating the initial rate period.
Steps to Comprehending Initial Rate Periods
Before seeing a financial advisor, home buyers in Maryland can follow these simple steps to understand adjustable-rate mortgages better:
Understand that the initial rate exists to provide a “teaser” for new home buyers. The terms of the adjusted rate determine the true value of the loan.- Review your financial situation, which may indicate the need for less advantageous terms in exchange for a low initial rate. Suppose one of your home’s primary earners is between jobs at the time of the move. In that case, you may not have the luxury of prioritizing long-term market advantage.
- Review the payment terms to comprehend the full cost of the loan before signing.
- Maximize the down payment, which can lead to a lower initial interest rate.
Contact a Professional Team to Maneuver the Initial Rate Period of Your Maryland Mortgage
In an uncertain market, Maryland home buyers seek beneficial initial interest rates on their ARMs. However, the initial rate period can be challenging to navigate due to the numerous calculations, terms, and conditions that often skew its value in favor of the lender. Many homeowners are unequipped to fully understand their agreements and how they can use them to their advantage.
Contact our team at Woodsboro Bank to learn how our professionals help Maryland homeowners navigate their initial rate periods and get the best loans for their situation, even in a seller’s market.