With the 30 year fixed rate trending higher over the past few weeks, some may be considering an adjustable rate mortgage (ARM) for the lower rate. An ARM may be worth your consideration if you are planning on not retaining the home or mortgage for longer than the initial fixed period. When contemplating an ARM, you should also factor the CAPS which limit how much the rate can adjust when the fixed period is over and on future adjustment dates.
In today’s post, we’ll compare the 7/1 adjustable rate mortgages to a 30 year fixed – please remember that the rates quoted below are subject to change… and they WILL change (probably before I’m able to publish my post). For your personal rate quote for your home located anywhere in Washington, please click here.
The 7/1 adjustable rate mortgage has a fixed rate for seven years. After 84 months, the rate may adjust up or down no more than 5% (this is the first “cap”). The highest or lowest the rate may ever adjust in it’s lifetime is limited by 5%. After the first adjustment, at 84 months, the rate is fixed for 12 months and then may adjust up or down annually, on the anniversary of the first adjustment date, no more than 2%. The annual adjustments are limited by the lifetime cap and by the “floor” (the very lowest the rate can adjust).
Rates quoted are as of 7:30 am, June 26, 2013 and are based on a loan amount of $400,000 with a loan to value of 80% and credit scores of 740 or higher for a purchase in Seattle closing by July 31, 2013.
30 year fixed rate: 4.500% (apr 4. 658%) priced with 0.981 discount points.
- Principal and interest payment: $2,026.74
- Principal balance at 7 years: $348,105.21
- Principal and interest paid at 7 years: $170,246
- Principal balance at 10 years: $320,357.88
- Principal and interest paid at 10 years: $243,208
7/1 adjustable rate: 3.875% (apr 3.683%) priced with 0.883 discount points. The highest the rate can ever be for the life of the loan is 8.875% (5 percent cap plus 3.875% note rate). The lowest the rate can ever be is 2.25% (the margin). The margin is added to the current index (LIBOR) at the time of adjustment to determine the new rate, subject to the limits of the caps. As of today, the 12 month LIBOR is 0.688.
- Principal and interest (P&I) payment: $1,880.95
- Principal balance at 7 years: $343,240.85
- Principal and interest paid at 7 years: $158,000
- P&I at first adjustment period (month 85): WORSE CASE – rate adjust up to 8.875% with P&I of $2,920.71. BEST CASE: rate drops to the floor of 2.250% with P&I of $1,767.41.
- Principal balance at 10 years: WORSE CASE is $327,543.74. BEST CASE is $311,605.70
- Principal and interest paid at 10 years: $263,145 assuming worse case adjustments or $221,627 assuming best case adjustments.
Here is the Fed’s booklet about adjustable rate mortgages, which I encourage you to read if you are considering an ARM.
If you are considering buying or refinancing your home located in Pasco, Puyallup, Port Angeles or anywhere in Washington state, I’m happy to help you!