With the average 30-year fixed mortgage rate climbing back above 7% in late September for the first time in well over a year, a quieter trend is showing up in the data: more borrowers are choosing adjustable-rate mortgages. According to recent weekly surveys from the Mortgage Bankers Association, the ARM share of applications has been rising, reaching close to one in ten applications in mid-September, as the average 5/1 ARM rate came in about a full percentage point below the 30-year fixed.
That gap is real money on a monthly payment. But an ARM is a different kind of loan, and it is worth understanding before you choose one.
How an ARM works. A common structure such as a 5/1 or 7/6 ARM offers a fixed rate for an initial period, often five, seven or ten years. After that, the rate adjusts periodically based on a market index plus a set margin, within caps written into the loan. Those caps limit how much the rate can rise at the first adjustment, at each later adjustment and over the life of the loan.
When an ARM can make sense. Buyers who expect to sell or relocate before the fixed period ends may benefit from the lower starting rate. Some borrowers also plan to refinance if rates fall, though that is never guaranteed and refinancing has its own costs and qualification requirements.
The risks to take seriously. If rates are higher when your loan adjusts, your payment can increase, sometimes significantly. Plans change, and people sometimes stay in a home longer than expected. Before choosing an ARM, ask your lender to show you the worst-case payment under the loan’s caps and make sure you could handle it.
Questions to ask your lender. What index and margin does the loan use? What are the initial, periodic and lifetime caps? Is there a prepayment penalty? How does this loan compare with a fixed-rate loan paired with a seller-paid rate buydown?
That last question matters in today’s market. With inventory elevated in many areas, including Houston, sellers are often open to concessions. A temporary or permanent buydown funded by the seller can sometimes deliver similar monthly savings without an adjustable rate.
This is educational information, not financial advice. Every borrower’s situation is different, so review your options with a licensed mortgage professional. The Audra O’Neal Team works alongside trusted local lenders and can help you structure an offer that fits your financing strategy. Contact us to talk it through.
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The Audra O’Neal Team | ONTX Realty Partners
Call or Text: 281-972-8200
Email: ONealTeamRocks@gmail.com
Web: http://www.ONealTeamRocks.com
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