Adjustable Rate Mortgage

An adjustable-rate mortgage (ARM) is a type of home loan with an interest rate that changes periodically, based on the market. The introductory period (typically 3, 5, 7, or 10 years) can have an interest rate that is initially lower than the current fixed rate offering. After the introductory period, the rate is variable based on current market conditions. 

Adjustable-rate mortgage advantages include:

• Typically get an introductory rate lower than the current fixed rate offering
• Good option if you plan on moving soon (before the introductory period is over)
• May be eligible to refinance into a fixed-rate loan when interest rates drop 

The borrower works with the lender to determine the introductory period that makes the most sense for them (3, 5, 7, or 10 years). For example, a 3/1 ARM has an introductory rate for the first three years, then will adjust up or down annually based on current market conditions. ARMs can also have caps on how much the rate can go up and floors on how much the rate can go down at each adjustment period. 

Some of the requirements to qualify for an adjustable-rate mortgage include:

• Minimum 620 credit score
• Debt-to-income ratio (DTI) cannot exceed 45% (monthly payment will be calculated using the higher of the introductory rate or the fully indexed rate)
• Requires at least 5% down payment for conforming loans
• Can get a loan amount up to the conforming loan limit, currently $726,200 for 2023 (in most areas) 

If market rates drop to a point you are comfortable with, you may be able to refinance to a fixed-rate mortgage and lock in that rate. Just make sure you do the math and determine that you will save money, after factoring in closing costs and loan term. 

A minimum loan amount of $175,000 is required to apply. Exceptions include mortgage products for properties located within the Greater Kansas City metro and surrounding areas. Contact a NASB Loan Officer for details on the excluded areas and/or zip codes.