When buying a home, many people default to the same choice: a fixed-rate mortgage. It is easy to understand. You lock in a rate at the start and make the same principal and interest payment every month until the loan is paid off. But there is another option worth knowing about, especially when mortgage rates are elevated: an Adjustable Rate Mortgage.
What Is an Adjustable Rate Mortgage?
As the name suggests, an ARM is a home loan where the interest rate changes over the life of the loan. The rate does not change constantly. It adjusts at set times based on the loan terms.
People Driven Credit Union offers two ARM options: the 7/1 ARM and the 10/10 ARM. With a 7/1 ARM, your rate is fixed for the first seven years, then adjusts once per year for the remainder of the loan. With a 10/10 ARM, your rate is fixed for the first ten years, then resets every ten years after that.
In both cases, rate caps limit how much your rate can move during an adjustment period. The adjusted rate is typically based on an index, such as a U.S. Treasury index, plus a lender margin. Your loan documents explain the index, margin, caps, and adjustment schedule for your specific mortgage.
At People Driven Credit Union, an Adjustable Rate Mortgage may be available for both new home purchases and mortgage refinances.
Benefits of an Adjustable Rate Mortgage
The biggest benefit of an ARM is the potential for a lower initial rate compared with a fixed-rate mortgage. A lower initial rate may mean less interest during the early years of the loan and a lower monthly payment during the initial fixed-rate period.
That lower initial rate can make an ARM worth considering in a few specific situations. It may be a good fit if you expect your income to increase before the adjustment period begins. It may also make sense if you plan to sell the home before the initial fixed-rate term ends. In that case, you may benefit from the lower initial rate without reaching the first adjustment.
Another common strategy is to use the lower initial rate during the first part of the loan, then refinance later if a fixed-rate mortgage makes more sense for your long-term plans. People Driven Credit Union does not charge prepayment penalties, which gives you more flexibility if you decide to pay off or refinance your mortgage later.
Explore ARM Mortgage Options
Compare PDCU's 7/1 and 10/10 Adjustable Rate Mortgage options for your next home purchase or refinance.
Potential Risks of an Adjustable Rate Mortgage
Although ARMs can offer useful benefits, they also carry risk. Your rate may go down after the initial fixed-rate period, but it may also go up. If rates rise before your first adjustment, your monthly payment could increase.
Rate caps help limit how much your rate can change, but they do not remove the risk of a higher payment. If multiple adjustments move upward over time, you could pay more interest than you expected. In some cases, you could pay more over the life of the loan than you would have paid with a fixed-rate mortgage.
That is why it is important to understand the initial fixed-rate period, the adjustment schedule, the index, the margin, and the rate caps before choosing an ARM. A mortgage loan officer can help you compare the numbers before you apply.
Talk Through Your Mortgage Options
Have questions about whether an ARM fits your plans? Connect with PDCU's Mortgage Loan Officer before you decide.
Why an Adjustable Rate Mortgage May Make Sense Now
When mortgage rates are elevated, an ARM can be worth comparing against a fixed-rate mortgage. The lower initial rate may help reduce your monthly payment during the first several years of the loan. For some buyers, that can make a meaningful difference.
An ARM may be especially worth exploring if you do not expect to stay in the home long term, if you plan to refinance later, or if you want to compare several mortgage scenarios before deciding. The right choice depends on your timeline, budget, risk tolerance, and future plans.
There is no guarantee that rates will fall before your ARM adjusts. That is why the decision should come down to the numbers, not a guess about the market. Before choosing an ARM, compare the initial payment, the possible adjusted payment, and the long-term cost of the loan.
If you are interested in an Adjustable Rate Mortgage, you can learn more about PDCU’s ARM options, connect with a mortgage loan officer, or request a personalized quote.
Get a Personalized ARM Quote
See how an Adjustable Rate Mortgage may work for your home purchase or refinance goals.
Frequently Asked Questions
Yes. Many borrowers choose to refinance before the adjustable period begins so they can move into a fixed-rate mortgage with more predictable monthly payments. People Driven Credit Union offers mortgage refinancing if you decide that is the right move later.
Your rate adjusts based on a specific index plus a margin set by the lender. When the index changes, your rate may change with it, subject to the rate caps listed in your loan documents.
With a 7/1 ARM, the rate is fixed for the first seven years, then adjusts once per year after that. With a 10/10 ARM, the rate is fixed for the first ten years, then resets every ten years after that. The better fit depends on how long you plan to keep the home or the loan.
Having your documents ready before you apply can help the process move faster. You will typically need:
- A copy of your driver’s license or state-issued ID
- W-2 forms from the last two years
- Pay stubs from the most recent 30 days
- Federal tax returns from the last two years, including all schedules
- Two months of bank statements, including all pages
- Contact information for your homeowner’s insurance agent
Call People Driven Credit Union at 248-263-4100 or stop by any of our branches in Livonia, Southfield, Warren, Ypsilanti, or Romeo. Have your application number ready and ask whether any additional documents are needed.
Mortgage loans are subject to application, credit approval, property approval, and program guidelines. Rates, terms, and conditions are subject to change. Membership eligibility requirements apply.
