While mortgage interest rates remain near historic lows, they have been slowly rising over the last year, increasing the cost of 30-year loans for borrowers.
Home buyers concerned about higher rates have other options to consider: an adjustable rate mortgage (ARM), which provides an initial lower monthly payment, or a 15-year fixed rate mortgage, which has a higher monthly payment but reduces the amount of interest paid over the course of the loan.
A Shot in the ARM
An ARM typically starts out at a lower interest rate than the classic, 30-year fixed rate. After an initial period, typically five, seven or 10 years, the interest rate adjusts over the life of the loan.
There are several different types of ARMs, but one of the most popular is the 7/1, which stays at the same rate for the first seven years and then adjusts yearly thereafter.
“After the fixed period, the rate can increase each year, but the good news is that there are caps on how high that rate can go,” says Peter Boomer, head of mortgage distribution for PNC Bank. “The opposite may also be true: it’s possible the rate will decline if market forces are pointing that way. The best advice is to check with your lender for the details.”
What You Need to Consider
Boomer said it’s important to know how long you expect to be in your home.
“The national average is seven years before homeowners sell or refinance, which is why the 7/1 ARM is so popular,” he said. “If you expect to be in a home for fewer than 10 years, then you may want to consider an ARM.”
Boomer suggests talking with a mortgage loan officer about whether an adjustable rate may save you money. Many people like the idea of that lower rate to start, while others prefer the peace of mind of a stable rate.
For traditional mortgages, refinancing remains a viable option if interest rates fall in subsequent years.
“It’s important to remember that mortgage rates rise and fall over time. It may be worth considering an ARM because over time there may be savings, as opposed to the cost of refinancing,” Boomer says.
Look at your family, job, future and goals to decide whether this option makes sense. Your family may grow, you may get a new job and relocate, you may downsize for retirement or face other changing financial conditions.
Another alternative is a shorter term fixed-rate loan, the most popular being 15 years.
According to Boomer, while a 15-year mortgage will have a higher monthly payment than a 30-year fixed, the interest rate is typically lower and you pay back the principle faster, which means you can save money on interest over the length of the loan.
“The good news for consumers is that there are many financing options available. Talk to your loan officer to discuss which best fits your situation,” he says.
To learn more about borrowing options, visit pnc.com.
Owning a home is on the path to keeping your American dream alive, and exploring your options can help you more easily achieve it.