Adjustable-rate mortgages (ARMs) are home loans with a variable interest rate instead of a fixed interest rate. Fixed-interest rate mortgage payments remain the same for the duration of the loan, while adjustable Maryland mortgage rates are only fixed for a predetermined period.
After this initial period expires, an adjustable rate mortgage changes based on new market conditions. If you are looking into mortgage rates and wondering which type of loan makes sense, or you have an existing ARM and want to know more, continue reading our guide to learn about rate changes with adjustable rate mortgages in Maryland.
What is an Adjustable Rate Mortgage?
Adjustable rate mortgages are split into two periods: fixed and adjusted. During the “fixed” period, usually around 5 years, the mortgage rate is fixed similar to any other home loan. This is often called the “introductory rate” because lenders will entice homeowners with low payments in this initial fixed period.
From the homeowner’s perspective, this could be beneficial in certain circumstances. Suppose one of your home’s primary earners is between jobs at the time of the purchase. In that case, low initial payments may be beneficial until the household’s income levels out. Alternatively, you may be planning to flip a house; in this case, an ARM could keep your payments low as you pass on the adjusted rate to the buyers.
After the introductory period has ended, the loan enters the adjusted period, which changes the rate. The amount it changes depends on the benchmark established by the contract as determined by current market conditions.
Is the Adjusted Rate Always Higher?
Notably, the adjusted rate is not always higher than the fixed rate. While the lender is betting on rising market prices to make the loan payments higher, falling rates may benefit the buyer. If the market moves in your favor, you may get the best of both worlds: a low intro rate followed by a low adjusted rate.
ARMs may be conforming loans, which meet federal loan standards, or nonconforming loans not backed by government guarantees. Most home loans will conform unless they are considered jumbo loans or are overseen by a government organization such as the VA or FHA.
Types of Adjustable Rate Mortgages
There are three types of adjustable rate mortgages: interest-only, hybrid, and payment option loans. They offer different terms depending on the situation.
Interest-Only Mortgages
Interest-only (I-O) loans do not require principal payments for a set period, usually the first 3-10 years. During this time, you only have to pay interest. Once the period expires, you will continue paying interest and a higher principal payment.
This type of loan can be beneficial for new homeowners. An I-O mortgage frees up cash in the first few years of homeownership when costs such as home repairs and furniture purchases can put additional strain on a family’s resources.
Hybrid Mortgages
A hybrid ARM changes the proportion of fixed-to-adjusted interest that you will have to pay. As with all ARMs, the rate is fixed at the start of the loan and then begins to “float” after a certain period. Unlike the rates in adjustable mortgages, floating rates change more frequently based on market conditions.
How often do floating mortgage rates change? It depends on the actual terms of the hybrid ARM. Hybrid loans are denoted by two numbers, such as 5/30. The first number indicates the length of the fixed period in years, while the second number refers to how long the adjusted rate will last.
For a 5/30 ARM, the initial rate will be fixed for the first five years of the loan. Then, the loan will have a floating rate for the next 30 years. The bottom number could be smaller as well. In a 3/1 ARM, the rate will change every year after the initial fixed period of 3 years.
Payment-Option Mortgages
Payment-option mortgages let the borrower choose how to pay off their mortgage. Options include paying off the principal and interest at the same time, paying only the interest, or paying an agreed-upon minimum.
While delaying principal payments can help buyers remain cash solvent, your interest rates will increase in the long run to make up the difference.
Contact Woodsboro Bank for Maryland Adjustable Mortgages Rates
Woodsboro Bank offers flexible mortgage options for new homeowners and refinancers alike. If you are looking for adjustable-rate mortgages in Maryland, contact us today to learn about our competitive rates and how we can help you find the loan that makes sense in your current situation and 5-10 years from now.