Should I Fix My Mortgage?

October 25, 2010 No Comments »

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With mortgage rates so low, many borrowers looking to purchase a home or refinance are locking in fixed rate mortgages, but what about the long-forgotten adjustable-rate mortgage?

ARMs are at record lows too, and going for a lot less than their fixed-rate brethren.

But when you go with an ARM, you obviously run the risk of holding a variable rate, and one that may reset higher (remember this chart).

However, if you only plan to stay in the property for a few years, or you can pay off the mortgage in a short amount of time, it may not make sense to “fix your mortgage.”

Let’s compare the two options:

Loan amount: $250,000
5-yr ARM: 2.75% – payment: $1,020.60
30-yr Fixed: 4.25% – payment: $1,229.85

In our scenario above, the mortgage payment on the 5-year ARM is $200 less per month than the fixed-rate mortgage option.

That’s more than $2,400 in savings annually, and $12,000 over the course of five years.

Remember, the ARM won’t adjust for the first five years, because it’s a hybrid (fixed for 5 yrs, variable for 25 yrs).

So as mentioned earlier, if you don’t plan on staying with the mortgage for a long period of time, a hybrid ARM could make sense.

Just keep in mind that the savings may not justify the risk, or the stress you’ll feel in holding an ARM.

And the consensus seems to be that mortgage rates will rise this year and next, so you certainly won’t want to be caught out.

If you’re already in a fixed-rate mortgage, you may also be wondering when to refinance a mortgage?

Fact: 95 percent of new loans originated in the United States last year were long-term fixed mortgages.

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