Yesterday morning on CNN, "Money Expert" Clark Howard recommended that home owners who are considering selling their home in the next five years investigate refinancing into a 5/1 adjustable rate mortgage. Why would he suggest such a "risky" product? Interest rates for adjustable rate mortgages are extremely low right now and if you're not going to have the home for more than 5 years, you could save a significant amount of money.
I will be using worse case adjustments for this post, assuming that the index (12 months LIBOR) has climbed incredible to where the the rates have hit the lifetime caps (ceiling) of 5% at the first adjustment and have remained their at each adjustment. The 12 months LIBOR is incredibly low right now and those who have ARMs setting at their first adjustment are probably in a good position.
These rates as of June 15, 2011 at 10:30 am based on 740 or higher credit scores and a loan to value of 80% or lower. NOTE: We do have several programs available if for Seattle area home owners who have diminished home equity. This scenario is based on a rate-term owner-occupied refinance and a loan amount of $327,500.
3.00% for a 5/1 ARM (fixed at 3.00% for 60 months) with a principal and interest (p&i) payment of $1,381. APR 3.285. The "caps" that limit how much this rate can adjust are 5/2/5 so the highest this rate can ever be is 8.00% (worse case scenario) and the lowest is the margin (2.25%).
- At 61 months, assuming worse case scenario, the rate would adjust to 8.000% with a p&i of $2248 and an approx. principal balance of $291,600.
- At 85 months, assuming worse case scenario, the rate would still be 8.000% with a p&i of $2248 and an approx. principal balance of $283,228.
3.375% for a 7/1 ARM (fixed at 3.375% for 84 months) with a p&i payment of $1,448. APR 3.417. The highest this rate could ever be with 5/2/5 caps is 8.375% at the 85th payment and the lowest is the margin of 2.25%.
- At 61 months, the rate is still 3.375% with the same payment of $1448 and the balance is approx. $293,122.
- At 85 months, assuming worse case scenario, the rate would adjust to 8.375% with a p&i of $2270 and an estimated balance of $277,650.
4.500% for a 30 year fixed rate with a principal and interest payment of $1,659 for the entire term of the mortgage.
- At 61 months, the balance is approx. $298,500.
- At 85 months, the balance is approx. $285,000.
NOTE: the above rates are from June 2011 – if you would like a mortgage rate quote based on current pricing for your Washington home, click here.
What is crucial when selecting your mortgage is considering what your financial goals are. If you're not certain that you'll be selling your home in 5 years and you do not want to risk the adjustment that will take place in 61 months, you might want to consider the 7/1 ARM, which will "buy" you two more years of a fixed period for a slightly higher rate. If having an adjustable rate mortgage is going to keep you up worrying at nights, than a fixed product, like the 30 year or 15 year is probably a better option for you. If an adjustable rate mortgage is suitable for your financial scenario, the savings can really add up.
Personally, if you're considering an adjustable rate mortgage, I would recommend seriously considering the next longest term just to "buy" some wiggle room. I was honestly a little surprised that Clark Howard was pushing a 5/1 ARM when the 7/1 is currently just a little higher. Whatever choice is made, it belongs to the home owner and it is their responsibility to understand the risk, rewards and terms of what ever mortgage product they select.
If you have questions about mortgages for homes located anywhere in Washington, please contact me. By the way, if your mortgage originator is no longer in the business (many have found new careers with the higher standards now required), I'm happy to adopt your mortgage – no refinance or transaction is required - your mortgage does need to be on a home located in Washington.