I know, I know, you say "no way am I going with an adjustable rate mortgage(ARM), I heard about all the people getting in trouble with the sub-prime mortgages that adjusted. I think I'll just go with a fixed rate for my new house." Rest assured, I am not talking about a sub-prime mortgage, and remember, my goal with this blog is to give you information so that you can make more informative choices. But with rates now hoovering around 5% (still very low, all things considered), the belief is that rates will rise some throughout the year, so it is only wise to look at all the alternatives.
Back in the 80's and 90's, adjustable rate mortgages were a very common option, in fact the mortgage on my first home in 1990 was a 3 year ARM. But in recent years the fixed rate has been so low and the rate spread between a fixed rate and an ARM was not substantial enough to make an ARM a consideration.
But today, right now, it is a different story. A 30 year FHA fixed rate today sits at 5.25% and an FHA 5yr ARM is at 3.75, quite a big spread, which by the way, is at a historic level. Plus, with the FHA 5yr ARM, the rate cannot go up more than 1% each year after the 5th year and it has a lifetime cap of 5% over the original rate. Let me explain how this alternative could work for you.
Let's say you are mortgaging $300,000, with the fixed rate of 5.25%, your principal and interest payment would be $1,657/month and with the 5yr ARM at 3.75%, your payment for the first 5 years would be $1,389/month. If you compare the total amount in payments that you pay over 5 years, there would be a savings with the ARM, of over $16,000. Let's take it a little further, say it jumps up 1% in year six to 4.75% with a payment of $1,565 and jumps another 1% in year seven to 5.75% with a payment of $1,750, you would still have paid $16,089 less in payments.
In the first five years you will be paying $268 less each month. There are several things you could do to make that money work for you. Pay extra each month to your mortgage decreasing your interest paid, start a rainy day money market account, increase the amount you put towards retirement, or a combination of all three. There are obviously many things that you could do, but the main thing is that you discuss this with a financial advisor or maybe your accountant to get the most bang for your buck.
The average time period for someone to be in the same mortgage is 7 years, but you have to look at your own situation and consider if it is right for you. If you are buying a condo or townhouse and know that you want to move to a bigger home in 5-7 years, it could be perfect for you. For some people, paying for the security of a fixed rate mortgage is worth it.
Although I used the example of a 5yr ARM, there are other length ARMs out there. So if you are getting ready to purchase a new home or refinance, get together with a reputable lender and discuss all our options.
If you are preparing to buy or sell your home in the Bucks-Mont area, contact me and I would be glad to help you with every step of the process.
Please visit: http://www.patgarisrealtor.com/, there you can search the entire MLS for homes, you can find helpful information about buying or selling, and you can check out all my listings.
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