How the once avoided ARM may be a smart move for homeowners
A Brief Description/History of ARMs
Adjustable Rate Mortgages (ARMs) are loans that- at some point in the term- have an interest rate that is not fixed (30-yr loans and 15-yr loans have interest rates that are fixed for the life of the loan). Most ARMs start with a period of time- usually 5-10 years- where the rate is fixed, but is allowed to vary after that period.
Why would anyone want a variable rate mortgage? The reason is that ARMs with a fixed term often start with an interest rate that is significantly lower than the going rate for 30-yr and even 15-yr loans. The savings accumulated over the fixed term can be substantial.
ARMs used to be quite popular. During the housing bubble (from about 2003 – 2007), ARMs were almost as prevalent and 30-yr fixed rate loans, because they offered affordable payments when home prices kept shooting up. However, some ARM products were just…not good…and were used/sold inappropriately. For example, the infamous Option ARM offered a “teaser” rate in the first year, but after that, the mortgage balance actually increased each month.
After the crash, ARMs became quite unpopular and- due to increased regulation- didn’t really provide much benefit. In fact, until recently, ARMs had higher starting rates than 30-yr mortgages, so it just didn’t make sense to get one.
The Rebirth of the ARM
As the economy has been improving, interest rates have been rising. Since the November election alone, mortgage interest rates have increased almost 0.75%, and there appears to be no end to that trend. In order to keep selling loans, lenders have made ARMs significantly more attractive.
Note that a the part of the ARM description is the period of time for which the rate is fixed (so a 5/1 ARM would be fixed at the starting rate for 5 years).
|
30-yr Fixed |
5/1 ARM |
7/1 ARM |
10/1 ARM |
|
|
Interest Rate |
4.250% |
3.375% |
3.625% |
3.875% |
|
Payment ($200K mortgage) |
$984 |
$884 |
$912 |
$940 |
Notice the savings of a 30-yr compared to an ARM: the payment difference is as much as $100, in this example.
Should You Consider an ARM?
An ARM may be the way to go if you fall into one of these categories:
· You’re confident you will only have the mortgage for around 7 years – Studies show that Americans tend to move every 7-9 years and refinance every 5-7 years. If you think it’s quite likely that you’ll do one of these, then an ARM may be a smart move. Note that even if you had to stay into the variable period of the mortgage, and your rate increased 1% each year, you would still see a net benefit for even 3 years after your rate adjusts (let us know if you’re interested in seeing “the Math”).
· You’re confident that rates will decrease – This is a questionable conclusion in this market (most experts agree that rates will continue to rise for the foreseeable future), but if you’ve got a crystal ball or some insider information, get an ARM and laugh all the way to the bank!
Evergreen Mortgage offers not only the most competitive Fixed-Rate mortgage in the state, but also the lowest ARMs, so call us today and get a side by side comparison!
