Adjustable rate mortgages are becoming attractive once again for those who do not
plan on retaining their mortgage beyond the fixed period or who can stomach the unknown of what exactly their rate may be once the fixed period is over.
Today I quoted the following rates for a home buyer in Seattle with a 740+ mid-credit score who is buying a home with just over 20% down payment to have a loan amount at $417,000.
30 Year Fixed: 5.125% with 1 point (APR 5.281%) Principal and interest payment of $2,270.51.
10/1 ARM: 4.625% with 1 point (APR 5.883%). Principal and interest payment of $2,143.96.
5/1 ARM: 4.125% with 1 point (APR 6.480%) Principal and interest payment of $2,020.99.
Let me begin by saying there is nothing wrong with a 30 year fixed rate in the low 5s. In fact, historically speaking, it's a great rate. What I'm most excited about is the return of the 10/1 ARM. The 10/1 ARM offers a long term at a lower rate. Based on this scenario, the monthly savings is $122.97. Over a five year term, if you put that savings into a mattress; this is a savings of $7,378.20. Use this amount to pay off non-tax preferred debt or to apply towards reducing the principal balance and it's even more beneficial.
Do factor how long you're planning on staying in your home and/or retaining the mortgage. Remember that "life happens" and should you opt for a shorter period ARM, such as the 5/1 ARM, with intentions of moving–you may find yourself dealing with an adjustment that you were not planning on. It's all about knowing what your options are, understanding your choices and the terms of the mortgage and making an informed decision.
I think, personally and professionally that mortgage ARMS are a ticking time bomb. I understand that some people aren’t concerned with the reset due to plans to not be in the mortgage that long. However, as they say “stuff happens” and this often results in a change of plans making the ARM not only unattractive but down right dangerous. This is particularly true in this economy. Jobs disappear. Businesses take major hits, etc. Also, the rate difference, particularly when you take into effect taxes just isn’t enough to make these ricks palatable.
Ron, people need to evaluate their financial plans and make their own informed decisions. I don’t think someone should start with an ARM if their plan is to be able to “refi out” of it. I do think it’s important that people know that there are options and what they are.