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ARM Loan Benefits for First-Time Buyers in California

First-time home buyers in California have a lot of options when it comes to the type of mortgage loan they use. And there are pros and cons associated with most of these options. The key is to find the financing strategy that works best for your particular situation, with your long-term goals in mind.

Today, we will focus on one type of mortgage loan in particular. We will examine the benefits of using an adjustable-rate mortgage loan as a first-time buyer in California.

Definition of the Adjustable-Rate Mortgage Loan

Let’s start with a basic definition and move on from there. The name of this home loan tells you a lot about how it behaves over time. It’s called an adjustable-rate mortgage (ARM) loan because it has an interest rate that can change over time.

Most of the ARM loans available today start off with a fixed interest rate for the first 1 to 5 years. But after that initial phase, the interest rate can adjust from one year to the next. They can adjust upward or downward, depending on current market rates at the time of the adjustment.

ARM Loan Benefits for First-Time Buyers

Adjustable-rate mortgage loans offer several benefits for first-time home buyers in California. They might not be right for every purchasing scenario. But in certain cases, this financing strategy delivers a lot of advantages. So let’s take them one at a time.

1. Lower initial interest rate

The biggest benefit of using an adjustable-rate mortgage loan is that they tend to have lower interest rates than fixed-rate mortgages. (At least initially.) As mentioned in the previous section, an ARM loan can have a fixed rate for the first few years. During this phase, the interest rate for an adjustable mortgage is typically lower than a fixed rate loan.

Granted, the specific rate you receive for a mortgage loan will depend on several factors, including your credit score and down payment. But on average, ARM loans used by first-time buyers in California tend to have lower interest rates during the first few years.

This is what attracts a lot of first-time buyers to the adjustable mortgage products in the first place. And it paves the way for the next benefit, which has to do with monthly payments…

2. A more affordable monthly payment

A typical mortgage payment is comprised of four components – the principal amount borrowed, the interest rate, property taxes, and insurance. So, if you’re able to lower any one of these components, you can end up with a smaller monthly payment as well. And that’s another benefit offered by an adjustable-rate mortgage loan.

By securing a lower rate for the first few years of the term, you could reduce the size of your monthly payments. This in turn can make the loan more affordable. But again, you have to consider the long-term possibility of rate adjustments, once you get past the initial fixed phase of the loan.

3. Increased buying power

First-time home buyers in California who use ARM loans can also increase their purchasing power. This means they can buy more house, compared to if they used a fixed mortgage. The lower rate associated with adjustable home loans allows home buyers to shop within a broader price range. This could increase the chance of finding a suitable property within your budget.

How to Determine If It’s Right for You

Adjustable-rate mortgages are well suited for some first-time home buyers in California, but less so for others. How do you know if it’s the right option for you? For starters, you can think about your long-term plans over the next few years.

If you’re planning to stay in the home (and keep the loan) for many years, you might want to consider using a fixed-rate mortgage loan. This option gives you more predictability and stability over the long-term.

On the other hand, if you think you might be staying in the home for a few years and then moving on, an ARM loan might be a suitable mortgage option for you. It would allow you to secure a lower interest rate and save money during those initial years, while avoiding the rate adjustments that come later on.

Some first-time buyers in California use an adjustable mortgage loan and then refinance a few years later, to secure a fixed rate. So this is another strategy worth considering.

With all of these scenarios, the most important thing is that you understand how these loans work, and how they might affect you over the long term. We’ve provided this article to give you a solid introduction into the world of adjustable-rate mortgage loans. But as a home buyer, you can benefit from additional research.

Have Mortgage Questions?

Bridgepoint Funding serves the entire state of California. As a mortgage broker, we can offer a broad range of financing options to our clients. If you have questions about adjustable-rate mortgage loans, or any other aspect of the financing process, please contact our staff. We can evaluate your current financial situation to help you choose the right type of mortgage loan.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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