With rising interest rates, this is a great time to take a fresh look at adjustable rate mortgages (ARMs) for your purchase and refinance. These are not the exotic ARMs involved in the subprime meltdown – they are traditional, 5/1 ARMs with unbelievable rates that are in the threes today! That’s more than a point lower than 30-year fixed rates.
A 5-year ARM is a loan with a fixed rate for the first five years that has a rate that changes once each year for the remaining life of the loan. Because the interest rate can change after the first five years, the monthly payment may also change.
A 5/1 ARM combines the best features of adjustable and fixed rate products. It delivers a very low interest rate and therefore, a lower monthly payment typical of ARMs. But the five-year rate lock gives homeowners the stability and predictability of fixed payments that will not increase in the near future.
For the right borrower, a 5/1 ARM can be an excellent choice. If you are a client either:
Planning to move in the next 5 years – the rate will never adjust if they sell the home in that time period, or anticipate a salary increase– an ARM may allow you to enjoy lower monthly payments or a larger home while your pay is ramping up.
Choosing a 5/1 ARM could save you money on your monthly mortgage payment. For example, let’s say you are purchasing a $200,000 house and putting down 20%. After borrowing $160,000 at a 7% interest rate, your monthly payment on a 30-year fixed rate mortgage is $1,064.48 each month. A 5/1 ARM can get you into the same house but with lower initial monthly payments. With a 5-year ARM you may be able to start out with a 6.25% interest rate, therefore making your monthly payments only $985.15 for the first 5 years of the loan. However, after the 5-year fixed period, the interest rate can change based on the index. Because of this, it is essential that you be sure you can still afford the monthly payments if interest rates go up. Most 5/1 ARM’s will have a lifetime payment cap that limits how much the interest rate on your loan can rise.
Weigh your options carefully when deciding on the mortgage product that is best for you. If you want to take advantages of the lower initial interest rates associated with an ARM, but want to have some of the security of a fixed-rate loan, a 5/1 ARM may be the option for you.
If you have any questions about the 5/1 ARM or any other mortgage products please contact 1862 Mortgage. We have a full staff of loan officers in all of our Ruhl&Ruhl offices that would be happy to help you make the best decision.
And as always keep checking RuhlHomes.com for the most up to date information on the housing market.
Some information and statistics provided by: The Mortgage Fortune