With Higher Interest Rates, Will Adjustable-Rate Mortgages Make a Comeback?

Kailua-Kona luxury homes offer a stunning variety of amenities for residents. This beautiful community is located on the western side of the island of Hawaii. Consistently balmy temperatures provide ongoing opportunities to take advantage of the incredible beaches and warm ocean waves. There are also coffee plantations, luxury shopping, and fine dining to enjoy in the Kailua-Kona area. 

If you are considering the purchase of a new luxury home here this year, you may also be making decisions about financing. There are several different options available, including adjustable-rate mortgages. Read on to see if this would be a good option for you.

An adjustable-rate mortgage, or ARM, is a type of mortgage with two different interest rate periods. The first, fixed period provides a fixed interest rate for a set amount of time. The most common is the five-year option, although seven-year and 10-year periods may also be available. 

This interest rate for ARMs is typically lower than the rate for other types of loans. After the fixed period, however, the interest rate adjusts to the current market rate. The mortgage then enters the adjustable period, at which the interest rate will continue to change for the lifetime of the loan. The most common is a 5/1 ARM that adjusts the rate yearly after the fixed period. With an ARM, homeowners need to be prepared for annual changes in their monthly mortgage payments once the adjustable period begins.

A fixed-rate mortgage is exactly as advertised. When homeowners pursue a fixed-rate mortgage, they are locking in the current interest rate for the entirety of the loan. With this type of loan, the monthly mortgage payment will stay consistent yearly. The only way the interest rate would change (along with the monthly mortgage payment) is if the homeowner were to refinance their loan as a better rate becomes available. Fixed-rate mortgages, often called conventional mortgages, are currently the most popular loan option for buyers. With a fixed-rate loan, homeowners can rely on a consistent loan payment without a potential increase.

An ARM loan and a fixed-rate mortgage loan have one main similarity: each type offers lenders the same time to pay it off. With either loan, buyers can opt for a 15-year or 30-year time frame.

More and more buyers have been drawn to ARM loans in recent months based on the unprecedented rises in interest rates. The number of buyers applying for this type of loan had quadrupled by the end of last year. With an ARM loan, the initial mortgage payment is often significantly lower than it would have been with a conventional, fixed-rate loan. With the surge in interest rates, buyers who may not otherwise have been able to afford a home or may have been reluctant to pursue an investment have pursued ARMs as an opportunity to meet their real estate goals.

Over the years, fixed-rate loans have remained the most popular option for buyers planning to finance their new homes. Even with the number of ARM loan applications increasing significantly, the total number is still well below that of fixed-rate applications. As the interest rates peaked last fall, the number of ARM loans did, too. As many experts are now predicting that interest rates will drop below 6% this year, this may affect the number of applications for ARM loans.

When deciding upon your loan type, two factors are your financial situation and personal real estate goals.  

Your overall financial situation is the first factor in deciding whether an ARM loan is right for you. After the fixed period with the set interest rate is over, you will face a change in interest rates. As this is based on the market's current state of interest rates, you have to be ready to adjust your monthly payments accordingly. The interest rates could be lower, meaning even more savings in your pocket. If the rates are higher, your monthly payment will also be higher. Be sure that your finances moving forward will allow you to adjust to the changes in interest rates accordingly.

The second factor in considering an ARM loan concerns your real estate goals. Are you pursuing a North Kona home for sale, intending to list and sell again within a few years? Or will your new real estate purchase in Kailua-Kona be a long-term investment? 

If you plan to sell and pay off the entirety of the loan before the fixed period ends, an ARM loan might be a good option. If you plan to keep the property long-term, consider your budget and how a change in interest rates could affect your bottom line. In addition, if you plan to pay off the loan in full within a few years anyway, an ARM loan might suit your needs better. With the lower monthly payment during the fixed period, you can save or put more toward the loan balance.

Homebuyers have several options to choose from when it comes to financing their new luxury home. While fixed-rate mortgages remain the most popular, ARMs offer advantages for the right buyer. Investigate your options concerning your finances to arrive at the best decision for your purchase this year. 

If you are ready to look into luxury homes, hire an experienced and knowledgeable Kailua-Kona real estate agent. Kris Hazard has over 20 years of experience as a realtor in this beautiful area. She is passionate about helping her clients meet their individual real estate goals. When you are ready to find the perfect property, contact Kris at Compass.