Is an Adjustable-Rate Mortgage a Good Short-Term Strategy Until Interest Rates Cool Off?
Mortgage rates have been rising steadily for more than six months and are projected to continue increasing for the near future. If you’re in need of a home loan today, the most effective short-term strategy may be to obtain an adjustable-rate mortgage, which will lock in a relatively reasonable interest rate for anywhere from six months to seven years.
In that time, there’s a good chance that interest rates will cool off, which may result in your interest rate dropping once the fixed period comes to an end. In this article, you’ll learn if an adjustable-rate mortgage can be used as a short-term investment strategy.
Interest Rates are Expected to Increase
At the moment, 30-year fixed mortgages are experiencing sizable increases in interest rates. Even though the average interest rate for a 30-year fixed mortgage has risen to more than 7% from well below 5% in just a short period of time, it’s possible that interest rates will increase even more.
If the Federal Reserve continues to raise its fed funds rate, buyers will likely pay higher interest rates on mortgages. Until inflation cools down, the Federal Reserve won’t change the tactic it’s taking. In general, mortgage rates will likely worsen before they start to improve. However, the Federal Reserve will eventually stop increasing the fed funds rate, which is when mortgage interest rates should start to decrease.
If you’re looking to invest in a home in the near future, an adjustable-rate mortgage may be exactly what you need to get past the increasing rates with a reasonable rate for your mortgage. Keep in mind that these mortgages are only a short-term solution. In six months to a year, you may be able to obtain a more affordable 30-year fixed mortgage via a mortgage refinance.
An Adjustable-rate Mortgage May Not Adjust
Adjustable-rate mortgages have the potential to saddle homeowners with consistently rising interest rates once the initial fixed period has concluded. However, these mortgages aren’t as volatile as they can appear to be at first glance. Since you have a lengthy period when the interest rates are fixed, the mortgage can potentially be used as a fixed-rate mortgage that you eventually refinance to a 30-year mortgage.
You might not hold the mortgage long enough for the interest rate to begin adjusting. If the fixed period for your adjustable-rate mortgage is set to last for five years, you could even sell the property before this time is up, which means that you would have had a fixed interest rate for the entire duration of the mortgage.
Even though interest rates have been rapidly ascending throughout 2022, they may start dropping to a more logical level towards the end of this year or in the early months of 2023. With the right approach, you can avoid the high costs that come with a fixed-rate mortgage.
An Adjustable-rate Mortgage Can Help you Manage Costs Until Mortgage Rates Drop
In recent months, adjustable-rate mortgages have started to appear much more affordable than fixed-rate mortgages, which is normal since interest rates have been increasing at a steady rate. Since you’re taking on the risk associated with an adjustable-rate mortgage, your initial interest rate should be lower than it would be if you were applying for a 30-year fixed mortgage.
In fact, the average interest rate for a 30-year adjustable-rate mortgage is currently around 5.39%, which is much lower than what you would spend on a 30-year fixed mortgage. While the interest rate would invariably increase once the fixed period ends, you can simply convert this mortgage to a fixed-rate mortgage once interest rates start to decrease.
Among the most popular options for adjustable-rate mortgages is a 5/1 ARM, which will provide you with a fixed interest rate for five years. The nearly 2% difference between ARM loans and fixed-rate loans may be enough to take on the risk that comes with an adjustable-rate mortgage.
When you’re looking to invest in real estate but don’t want to take on the high interest rates that come with a fixed-rate mortgage, consider opting for an adjustable-rate mortgage. During the fixed period where your interest rates remain the same, you could wait for interest rates to start cooling off, after which you have several options for obtaining a fixed-rate mortgage at a lower rate.