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Adjustable-Rate Mortgages in the Carolinas

If you are considering purchasing a home and need a loan in NC or SC, Dash Home Loans will match you up with the smartest loan option for your situation. For some, this means opting for an adjustable-rate mortgage, which is called ARM for short.

ARMs are mortgages that have adjustable interest rates versus a fixed rate throughout the lifetime of the loan. This mortgage type has some serious upsides for homeowners that are looking to pay off their full loan amount within a specific time. Does that sound like you? If so, stick with us as we dive into all the fun details of ARM loans.

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What Is an Adjustable-Rate Mortgage?

Let’s start with the basics. Every mortgage has an interest rate. It’s what you pay your lender in exchange for borrowing funds to buy a house.  An ARM is a type of mortgage where the interest rate varies throughout the lifetime of the loan. 

When homebuyers initially take out an ARM, the interest rate typically remains fixed for a specified amount of time—could be anywhere between one month or 10 years. The rate during this time period is typically lower than fixed-rate mortgage interest rates, hence the appeal. 

Once this period has expired, the interest rate of an ARM  will move based on an index set by market forces.  The interest that new homeowners pay can change on a yearly or even monthly basis.

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Since interest rates rise and fall based on an index, ARMs are also called “floating mortgages” or “variable-rate mortgages” in case you hear someone throw those terms around.  Before you call your lender, here are a few more terms that will help you understand the process (and make you sound like you totally know what you’re talking about).

  • Index: This economic indicator is used to calculate an ARM’s interest rate. It’s the benchmark used to determine whether premiums will increase or decrease at a given time.
  • Margin: Although ARMs are somewhat flexible, lenders typically fix a percentage point that the loan cannot fall below. This benefits the lender and makes sure they get a  certain level of interest for underwriting the mortgage in the first place.
  • Initial and Periodic Caps: The initial adjustment cap lets everyone know how much the interest can rise or fall the first time it adjusts, which happens after the fixed-rate period ends. This ensures that the interest rate doesn’t skyrocket to a crazy number. Homeowners also benefit from the periodic cap which determines how much the interest rate can change during a single interval.  
  • Lifetime Cap: If you want to do the math to calculate if an ARM makes more financial sense, you can use the lifetime cap in your estimations. The lifetime cap places a maximum limit on how much the rate can increase over the life of the loan, which directly correlates to how much interest you’ll have to pay. 

The terms of an ARM loan are typically expressed with two numbers. The first number represents the length of the fixed-rate. And the second number? It represents the length of the adjusted rate. So, for instance, a “2/5 ARM” equates to a fixed rate for two years followed by a floating fate for the following 5 years. 

It’s common for ARMs to also have a cap structure expressed with numbers. An example of a cap structure might be written out as “2/3/5.” To the borrower, the first number means that the interest rate can increase by a maximum of 2% above the initial interest rate in the first year. In the years following, rates can increase a maximum of 3%, as indicated by the second number. The final number indicates the max interest rate over the lifetime of the loan, so here, the loan can never increase more than 5%. Starting to make sense, isn’t it? 

What Are the ARM Requirements in NC & SC?

Ok, so you’re thinking that ARMs sound pretty great. Now the question is, what are the requirements for me to qualify for an ARM? Homebuyers interested in getting an ARM mortgage in North Carolina and South Carolina typically need to meet the following:

  • Credit Score: Borrowers typically need a credit score of 620 or higher to qualify for an ARM. People with scores as low as 500 may also qualify in certain circumstances, but your lender will let you know if that’s the case for you. 
  • Down Payment: If the home you want to buy will be your primary residence, the minimum down payment is usually 5%. For two-unit properties, borrowers should anticipate 15%. For equity stakes of three or more units, 25% is standard. When refinancing to purchase a second home, ARM down payment minimums can be as low as 10%. In some instances, borrowers can put down as little as 3.5%.
  • Loan Limits: In the Carolinas, maximum ARM limits on FHA, 1-unit properties run between approximately $331,000 and $765,000 depending on the county.
  • Debt-To-Income Ratio (DTI): The maximum DTI is usually 45% for ARMs that are manually underwritten.

If these requirements are making you nervous, let’s pause for a moment and note that these guidelines periodically change. North and South Carolina home buyers may have financial flexibility based on their portfolios. If you have questions about meeting the requirements, Dash Home Loans provides Adjustable Rate Mortgage assistance to determine if it’s the best option for you. If you don’t qualify for an ARM, there’s nothing to sweat. Dash will find the right program for you. 

ARM Eligibility in North & South Carolina

Anyone that wants to buy a house can apply for an ARM. Eligibility is determined by wide-ranging factors, and luckily, they are not necessarily income restrictions. Credit scores, income-to-debt ratios, down payments, and the amount of the home loan are all eligibility factors. It’s essential to work with a mortgage professional to determine eligibility and the best loan product for your needs.

Pros & Cons of Adjustable-Rate Mortgages

More and more people in North and South Carolina are choosing ARMs. By that same token, the benefits may not outweigh the disadvantages from your perspective. These are common pros and cons associated with ARMs. You should carefully consider all the factors before jumping feet first into your decision. 

  • Lower Monthly Payments: This is a pro, and a big one too, of going with an ARM. Borrowers will be paying a much lower interest rate during the fixed-rate period than their buddies with a fixed-rate mortgage. This turns into lower monthly premiums as well.
  • Short-Term Value: One strategy borrowers tend to use is taking out an ARM and later refinancing to a fixed-rate product. This allows them to take advantage of the initial cap while building credit and saving money. Homebuyers often refinance only if rates increase.
  • Payments Could Increase: Another ARM con? You run the risk of paying increased payments after your fixed-rate period. In some ways, an ARM has a certain element of risk-taking, because if rates uptick substantially, you could be paying more than you planned.

Work With Dash Home Loans to Secure an ARM Loan

If you’re feeling a little overwhelmed, take a deep breath. Let us walk you through the process. Our experienced professionals at Dash Home Loans take complicated banking jargon and break it down so everyday people can make informed decisions. We’ll work with you to discover if an ARM is really the best option for you, or if a different type of loan would be more beneficial. You’ll be paired with one local team member who will be by your side from start to finish. 

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Frequently Asked Questions

Learn More About ARM Loans

If you have questions about securing an adjustable-rate mortgage in SC or NC, our team is here to help you. Our Mortgage Coaches are happy to answer all of your questions and provide specific info to you. Here are some common questions about ARMs:

How does an adjustable-rate mortgage (ARM) work?

Borrowers enjoy a low-interest initial cap followed by periodic adjustments over the life of the loan. Depending on whether the interest rate index increases or decreases, monthly premiums can change as well. However, many ARM products have limits to prevent excessive increases

What are the advantages of an adjustable-rate mortgage?

ARMs typically have lower interest rates during their initial fixed period than fixed-rate mortgages. ARMs also have lower initial payments, allowing borrowers to qualify for larger loans.

Do I qualify for an adjustable-rate mortgage?

Adjustable-rate mortgages are generally easier to qualify for than their conventional, fixed-rate counterparts. Some people can secure an ARM with credit scores as low as 500 and down payments of 5% or lower. Borrowers would be well-served to speak with a professional and get adjustable-rate mortgage assistance.