What about an ARM? Adjustable Rate Mortgage, Benefits and Warnings.
In an earlier post I highlighted the difference between the high risk loans of a couple of years ago, the part they played in the housing and financial meltdown and the benefits of today's ARM products. In this post I'd like to focus on the proper application of these products. Anyone who doesn't understand all of the possible scenarios should not take out this type of loan. If the language or terms are confusing or too complicated, please use a loan you understand and are comfortable with.
Now, why would anyone seriously consider an Adjustable Rate Mortgage (ARM)? ARMs generally come with a 5 or 7 year fixed rate and payment, after which both may adjust for the remaining term. These are called 5/1 & 7/1 ARMs. During the fixed period your rate and payment are set just as on a 30 year fixed mortgage. If the borrower has strong reason to believe they will be moving within this initial period, these products should be seriously considered. How seriously depends on how certain they are of the future change.
Note rates currently as low as 3.5% for a 5/1 ARM translate into a significant monthly savings for the borrower. They also translate into greater borrowing power, enabling the purchase of a more expensive home.
Here is an example. I posted a fantastic 30 year fixed rate today of 4.625% (4.757% APR). On a purchase of $500,000 with 20% down your Principle & Interest Payment would be $2056.56. The same scenario on a 5/1 ARM at 3.5% (3.583% APR) principle & interest payment would be $1790.22. This would be a monthly savings of $266.31, or over 5 years a savings of $15,798.60.
For someone who will be moving or making other changes in that time or even shortly thereafter, this product should be available and recommended. Historically the average American moves every 7 years, or so I've been told. Chances are people with no clear plans may also benefit, but with around 5% fixed rate money available, why take the chance.
If you understand that after the fixed period ends your rate will likely increase substantially and you are reasonably certain that your housing needs will be changing at or near the fixed term of the loan, and you are comfortable with the risk/reward offset, then consider an ARM. If not, you still have incredible rates available and should take full advantage of the historically low rates.
As a lender, my only goal is to provide options to my clients and allow them to make the best decisions for their needs. I receive no greater compensation for one product over another.
What are your hesitations regarding an ARM? What applications do you see for this product now that it is back on the market and priced attractively?
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