11/20/2025
What is an Adjustable Rate Mortgage and how do they work?
People are typically scared off when they hear Adjustable Rate. Before I got into the industry all I had heard is to avoid them at all costs! I also didn't know a thing about them. So here is how they work:
At Mazuma we have, what's called, a 5/6 ARM. (Adjustable Rate Mortgage). It's an In-House Portfolio Loan.
The (5) means that for the first 5 YEARS IT IS FIXED RATE, at whatever rate we end up locking you at.
The (6) then means that AFTER the first 5 years, it can adjust once every 6 months based on the current market at that time.
So how can an Adjustable Rate be beneficial to you?
Our ARM typically runs around 1% lower than the fixed rate, so you are immediatley getting locked into 5 years at a much lower rate and will save on your monthly payment immediatley.
In this crazy market with rates all over the place, most people closing right now will want to refinance anyways, once the rates drop and they have the opportunity. So really, we have 5 years of the lower rate/payment, to be watching the market and waiting for the time we can jump you over into a lower rate Fixed Loan.
*This means that even if you would lock into a higher fixed rate now and have a higher monthly payment and higher interest rate, you would STILL be looking to refinance to a lower rate anyways. So you may as well take advantage of that 5 year period to save money.* Or you could know that you are only here for a shorter period of time and will be selling and moving prior to 5 years anyways.
Now who is a good candiate for this type of loan?
When you go to refinance your loan, whether it be an ARM or a Fixed Rate you will need enough Equity in the home to do-so. (Minimum 20% Equity) This means if you are putting 20% down on the purchase of the home, you are already in the qualifying range to refinance. If you put down 3-5% on the Purchase, you may not have enough equity to refinance, even when the rates do drop back down, so that is something to take into consideration.
If you know you will only be in the house 1-5 years and will be selling and moving regardless of the rates, then you won't need to worry about the equity anyways because you won't be refinancing.
People will still tell you to avoid an Adjustable Rate like the plague and if it were a 1 or 2 year fixed rate before going to the adjustable, I may agree with them. But in this case 5 years is a very long time to be able to get it switched over.
If it really comes down to it getting closer to the 5 year period, Mazuma Credit Union ALSO has a Cash-Out Refinance or No-Cash Out Refinance In-House Portfolio option where we can go up to 95% of your loan to value.
There's much more information regarding all kinds of Mortgage Options so if you have any questions please feel free to reach back out to me directly here.
NMLS # 2035110
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