Is it a Good Time To Look At Adjustable Rate Mortgages ?

Each week, government-led Freddie Mac publishes a survey based on data from 125 banks across the country.  According to this week's results, the relative rate of a 5-year ARM in Georgia is extremely low versus its 30-year fixed-rate cousin.

Consider this comparison:

  • In April 2009, the two products ran neck-and-neck with respect to rates
  • In April 2010, the two products are split by 0.99 percent

On a $200,000 home loan, that's a difference of $117 per month to a mortgage payment.

Adjustable-rate mortgages aren't suitable for everyone, but they can be a terrific fit given your individual circumstance.  For example, any one of the following scenarios could warrant a 5-year ARM:

  1. Buying a home with an intent to sell within 5 years
  2. Currently financed with a 30-year fixed mortgage with plans to sell within 5 years
  3. Interested in low payments and comfortable with longer-term interest rate and payment uncertainty

Additionally, homeowners with existing ARMs may want to refinance into a brand-new ARM, if only to extend the initial change date on the current note.

Before opting an ARM or a fixed, speak with your loan officer about how adjustable-rate mortgages work, and what longer-term risks may exist.  The savings may be tempting, but there's more to consider than just the payment. Call or click me to disuss

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April 16 2010 - US
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Replies (4)

The "plan to sale" or "refinance later"  backfired on millions in the last two years. The most important aspect about ARM's are how they adjust. FHA 3/1 and 5/1 ARM's with 1/1/5 caps are fairly safe. When you get 5/2/5 ARM's those can be a disaster looming on adjustment #1. my 2 cents
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April 16 2010
Profile picture for SoCal_Engr
I also posted a question about the "5 yr window", given the current state of the market. Most people anticipate selling at a profit, not at a loss. And, a reason many people are losing homes is because they can't sell, and can't afford to or are unable to refi. They bought into the practices of a bull market, and the bear is beating them silly.

Personally, I'd be inclined to shelve scenarios #1 and #2, at least until the market shows some stable upward momentum. And then, I'd remember that things were looking good...until they weren't, before I used #1 and #2 as a reason for looking at ARMs.

My modification to #1 and #2 would be...

If you are planning to sell within 2-5 years, and are sufficiently capitalized to afford to sell at a loss if need be to get out of the investment. In other words, take the "safe road" on your primary residence, save the ARMs for investing - where it really belongs.
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April 16 2010
No, no, and no.  I wish all adjustable rate mortgages were outlawed.  Homeowners should only be offered a fixed rate fully amortizing mortgage whether it is a 30 year fixed or a 15 year fixed.

There would have been a ton fewer problems today and possibly no real estate value and loan crisis if: 1. only fixed rates and 2. total payments cannot exceed 38% of gross fully documented income.
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April 16 2010
Profile picture for falsedawn
ARMs weren't (and still aren't) the problem. They are a tool, and like all tools, unless you know and understand them, and the risks involved with using them, you are going to get hurt.
The problem was that people "assumed" their houses could only go up in value and they'd be able to refinance before the rates reset, with no contingency plan in place if that didn't happen (i.e. they never gave a second thought to how they'd be able to afford higher payments if they became unable to refinance). Hence you get 30K per year Walmart grunts buying 400K homes.
The problem was greed, pure and simple. Don't blame the hammer when you whack youself on the thumb with it.
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April 17 2010
 
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