Jun
03

ARMs Making A Comback?

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ARM (Adjustable Rate Mortgage) were very popular during the boom years, but fell out of favor because the rates were very close to those of fixed-rate mortgages.  Recently, because of historically low interest rates for fixed rate mortgages, the difference between fixed and adjustable-rate loans is targeted to bet widest in eight years, according to HSH Associates, which tracks mortgage rates.

 Do they make sense?

 Ask yourself:

  • Are you going to stay in the property 5 years or less?
  • Are you going to be able to refinance within 5 years?
  • If the rate adjusts upward in 5 years, are you going to be able to make increased payments?
  • Will you be able to sell for more than the loan balance when you want?

If you are a gambler, betting that interest rates won’t rise or you can sell before they do, maybe.  If you will only stay for 5 years or less, an ARM possibly makes sense.

Let’s look at some numbers.  One popular ARM loan is a 5/1 ARM.  It has a fixed rate for the first 5 years, then adjusts every year thereafter.  A recent ARM 5/1 was quoted at 3.4%.  The average 30 year fixed rate mortgage is 4.72%.  The difference between the two is called the ‘spread’.  In this example, the spread is 1.32%, big enough to save thousands of dollars during the first five years of a mortgage.

Although there are naysayers, ARMs are becoming more attractive, and may be an option for some borrowers. Weigh the pros and cons, speak to your financial advisor and make sure the ARM is right for you.

Based in part on an article from the Wall Street Journal by AnnaMaria Androitis

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