Q&A: “Advantages of adjustable rate mortgages.”
Clearly adjustable-rate mortgages are out of fashion at the moment with fixed-rate mortgage rates hovering near record lows.
In fact, Freddie Mac recently noted that 99 percent of prime borrowers who originally had adjustable-rate mortgages chose fixed rate loans when refinancing.
It’s been an easy choice for homeowners lately, as ARMs aren’t pricing at much of a discount compared to fixed rate loans.
But there will come a time when ARMs are back en vogue, so let’s look at some the advantages of these types of mortgages.
One of the biggest advantages of an adjustable-rate mortgage is the lower interest rate that usually comes with it.
Sure you don’t have the peace of mind of a fixed rate for the life of the loan, but the tradeoff is a lower rate initially, along with lower mortgage payments.
The savings can be beneficial if you plan to stay in the home for a short period of time, or expect rates to remain steady or fall in the future when it comes time to refinance.
Another plus is that most ARMs are also hybrids, meaning they’re fixed for some length of time before becoming adjustable.
Examples include 5/1 and 10/1 ARMs, which are fixed for the first five and ten years, respectively, before adjusting on an annual basis for the remainder of the loan term.
Most homeowners don’t see their 30-year loans through to the end, for reasons like early sale of the property or refinance, so one of these hybrids could be a sensible choice without too much downside risk.
The lower rate increases affordability, which isn’t only a plus, but may also be a necessity for those borrowers cutting it close in the qualification department (sadly this type of behavior contributed to the current crisis).
Keep in mind that you’re taking a risk when choosing an ARM (hence the discount), so take a hard look at the numbers compared to a fixed rate option and try to determine how long you plan to stay in the property.
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