For Massachusetts first-time home buyers, the process of choosing a mortgage can feel complex and overwhelming.
One of the many options that often arises is an adjustable-rate mortgage, commonly referred to as an ARM. Understanding how it works and whether it is the right choice depends on a buyer’s financial goals, risk tolerance, and the length of time they plan to stay in the home. Home buyers should carefully consider the pros and cons of an adjustable-rate mortgage.
An ARM is a type of home loan with an interest rate that changes over time. Unlike a fixed-rate mortgage, which has the same rate for the life of the loan, an ARM typically starts with a lower rate that stays fixed for a certain number of years, often five, seven, or 10. After that, the rate adjusts periodically, usually once a year. Rates change based on an index, such as the one-year Treasury yield, plus a set margin.
The primary appeal of an ARM is the lower initial interest rate, resulting in lower monthly payments during the initial fixed-rate period of the loan. The lower initial rate may help buyers afford a more expensive home or free up cash for other expenses, such as home improvements.
Buyers who expect to move or refinance before the initial fixed period ends may benefit the most. For example, if someone buys a home with a 7/1 ARM—meaning the rate is fixed for seven years and then adjusts annually—they might plan to sell the property within that seven-year window. In that case, they could take advantage of the lower rate without being affected by future rate increases. Of course, many first-time home buyers anticipate staying in their first home for five to seven years, only to find themselves there 15 to 20 years later.
Despite potential benefits, there are risks. Once the fixed period ends, the interest rate and monthly payment can rise, sometimes significantly. The rise in the monthly mortgage cost could lead to financial strain if a homeowner’s income does not grow at the same pace.
An adjustable-rate mortgage also comes with caps that limit how much the interest rate can increase at each adjustment and throughout the life of the loan; however, even with these limits, payments can become unpredictable and expensive.
Lenders are required to provide clear disclosures about how and when the rate will change. Home buyers must understand these details and consider how rate increases might impact their long-term budget.
In today’s market, where interest rates have been fluctuating, some buyers are turning to ARMs to lower their initial housing costs; however, this strategy only works if they plan carefully.
For first-time buyers, an ARM can be a helpful tool—but it is not the right choice for everyone. Those who plan to stay in their home for many years or who value predictable payments may be better served by a fixed-rate home loan. As always, working with a trusted lender or financial advisor can help clarify the best option based on a buyer’s unique situation.
