Is an adjustable rate mortgage right for me?

Thinking about buying a home or refinancing this year? An ARM, or adjustable-rate mortgage, might be a good option to consider. An ARM is exactly what it sounds like—you’ll get a fixed rate for the early portion of the loan (typically for 5, 7 or 10 years), and then your mortgage rate will periodically adjust for the remainder of the loan.

In this article, we’ll cover a few of the pros and cons that come with an ARM — but if you’re a “cut to the chase” type, we’ll tell you this: Mortgages can be complicated. The easiest way to decide if a mortgage change-up is the right call is to meet with a pro at Westerra.

An ARM might make sense for you if …

• You plan to refinance your mortgage or sell your house during that locked-in window of the loan, before your rate changes

• You’re anticipating a pay raise in the near future, but want a fixed rate right now

• You need help with a loan qualification — an ARM might help you borrow more than a fixed-rate mortgage

• You’re an investor: By keeping more money in your pocket during those more affordable first few years of the loan, you could grow those savings through investing strategies. Keep in mind that we do not provide investment advice

• You’re willing to take the risk. If interest rates remain low or even drop, you could find yourself with a lower rate without needing to refinance

You might NOT want an ARM if …

• You find change to be stressful and prefer budgeting with one fixed number

• You’re on a tight budget and wouldn’t be able to cover payments if the rate increases

• You have a weak credit score — if your rate changes and you want to refinance, being able to do so may be contingent on your score

• You’re in your forever home. ARMs are typically better for shorter-term home ownership

• You value simplicity. ARMs come with complicated structures, and some folks can find them hard to follow

Still not sure?

When it comes to the details of an ARM, make sure to focus on the three core elements: the margin, the index and the cap.

Margin is the percentage added to the index to calculate a new rate. This is a fixed amount and doesn’t change. This number is often the lowest rate of the loan.

Index is the financial index associated with your loan. The index value will increase or decrease as the market changes. Commonly used indexes are the Constant Maturity Treasury (CMT) and the Secured Overnight Financing Rate (SOFR).

Cap is exactly what it sounds like: the very highest amount your rate will reach. There are three numbers to look out for: the initial cap, the periodic cap and the lifetime rate cap.

If you’re not totally following, that’s okay. Here’s a different way of thinking about it: Say your favorite deli sells sandwiches for $10. The owner gets inspired by his new ARM and sets some new rules. Now, he decides that the price of the sandwich can change based on the weather—if it’s warm outside, the price goes up. If it’s cold outside, the price goes down. Let’s say he also has another rule: No matter the weather, he adds $2 to the cost of every sandwich. He also says that a sandwich will never cost more than $16, no matter what. In this scenario:

The sandwich is a mortgage

The weather is the index—it goes up and down based on factors out of your control

The $2 fee on top is the margin—it is always the same, no matter what

The $16 sandwich maximum is a cap

Keeping that metaphor in mind, consider Westerra’s 5/6 SOFR ARM with 2/1/5 caps:

For the first 5 years, your rate is fixed

Then, your rate can increase or decrease by 2%

After the initial adjustment, your rate can adjust by 1% every 6 months but won’t ever go up more than 5% of the note rate

The rate is determined by adding a 2.5% margin to the SOFR rate

You may also hear about a 5/1 ARM option: Westerra does not offer these, but they are very similar to our 5/6m ARM. Instead of adjusting 1% every 6 months, the rate on a 5/1 ARM may adjust up to 2% every 12 months

Feeling lost? Hungry from all the sandwich talk? We understand. ARMs aren’t a one-size-fits-all choice, and the best way to know for sure what is right for you is to come in and chat with one of our experts. We’re here to help you understand the fine print, clear up any mortgage questions and find the best financial solution possible. Ready to talk details? Give us a call at 303-321-4209, stop by at your nearest branch location or visit westerraCU.com.

Loan approval is subject to credit approval and program guidelines. Credit Union membership required. Interest rate and program terms are subject to change without notice. Please contact a Westerra Credit Union Mortgage Loan Officer at 303-321-4209 for more details. Westerra Credit Union NMLS 421606.