Is a floating interest rate right for you?
All home loans are tied to mortgage interest rates which go up or down for various reasons, including changes in the economy and financial markets. Fixed-rate mortgages offer stable payments, while home loans with floating interest rates have lower initial payments that can decrease or increase over time. Deciding whether a floating interest rate is best for you depends on your financial situation, budget, risk tolerance and long-term goals.
What’s a floating interest rate mortgage?
A home loan with changing interest rates is known as an adjustable-rate mortgage or ARM. If you choose an ARM, your monthly payments can periodically float up or down when interest rates fluctuate. ARMs may also be called floating interest rate or variable-rate mortgages.
A floating interest rate mortgage usually starts with a fixed interest rate that lasts for a set period. After this period, the interest rate adjusts based on an agreed-upon index.
On the other hand, if you choose a fixed-rate mortgage, your interest rate will remain the same for the entire life of the loan, resulting in a fixed loan payment amount that will not change.
The top three advantages of floating interest rate loans
There are several advantages to a floating interest rate versus a fixed-rate mortgage, including lower up-front payments and an opportunity to save if interest rates decrease.
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1. Lower introductory interest rates
You may be charged a lower initial interest rate for an ARM versus a fixed-rate mortgage, so your monthly payments will be lower at first. This might make sense for you if you plan to sell before the interest rate adjusts.
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2. Flexibility
You can refinance before the interest rate adjusts, which can help you lock in a lower interest rate or switch to a fixed-rate mortgage.
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3. Opportunity to save
If interest rates stay steady or decrease over time, your ARM could be less expensive over a long period giving you the benefit of lower monthly payments than a fixed-rate mortgage. Use our mortgage payment calculator to tell us about the home you are interested in, and we will show you how much your total monthly payment will run each month.
Despite these advantages, it’s essential to understand that your monthly payments may go up. If you’re comfortable with the possibility of higher mortgage payments in the future, an ARM may be a good fit for you. Before deciding, discuss the maximum amount your payments could increase with your local loan officer.
How much can a floating interest rate vary?
Typically, your floating interest rate varies based on the agreed-upon index that your loan is tied to and the terms of your loan. There are limits on how much your interest rate can increase from one period to the next. All ARMs also have a lifetime cap which limits the interest-rate increase over the life of your home loan.
How often do floating interest rates change?
An ARM starts with a fixed interest rate that lasts for a set period, usually five, seven or ten years. After this period, the interest rate adjusts or floats based on an agreed-upon index, which can cause it to go up or down.
What kinds of home loans offer a floating interest rate?
After you’ve provided the necessary information to your loan officer, they will guide you on the best loan option for your needs and financial situation. There are several options available, each with unique eligibility requirements:
- Conventional loans
Homebuyers seeking a Conventional loan typically enjoy the largest selection of loan options at the most competitive rates, with both fixed- and floating-rate options available.
- Government-backed loans
When applying for a floating interest rate lending program, you may choose a government-backed loan, such as an FHA, VA or USDA loan. FHA loans are great for first-time homebuyers.
With only 3.5 percent down required and credit scores as low as 540*, borrowers can still become homeowners even with a less-than-perfect credit score. VA home loans open the door to homeownership by eliminating the need to spend years saving for a down payment or building a good credit history.
USDA loans are available to homebuyers with low-to-average income for their area, offer 100 percent financing with reduced mortgage insurance premiums and feature below-market mortgage rates.
- Jumbo loans
If you’re looking to move into a more expensive home than the average national home price, a Jumbo mortgage loan can give you more buying power than a Conventional loan.
Worried about increasing interest rates? You can lock in your rate while you shop and avoid further fluctuations. Programs like the Guild Mortgage Lock and Shop Program** offer rate protection for a specific period and a one-time rate float-down option if rates go down while you shop for a home. Confirm with your loan officer any associated costs and the lock duration available.
For full terms and conditions, visit www.guildmortgage.com/homebuyer-protection/
Choosing a mortgage is one of your most important financial decisions. Don’t hesitate to ask your Guild loan officer about the advantages and disadvantages of floating interest rates. We’re here to help!
*Credit scores under 580 require a minimum of a 10 percent down payment.
**Upfront lock-in fee required at the time of lock. Conforming loan limits only.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.