February 4th, 2018 10:23 AM by Jackie A. Graves, President
Mortgage rates look great right
now—especially if you compare them to three decades ago when the average
30-year fixed-rate mortgage offered a rate of 10.34 percent. If you go back
further, to 1981, rates reached an eye-popping 18.45 percent.
fixed-rate mortgage was introduced at the end of the Great
Depression to make home ownership accessible. At the time, only one in 10
people owned homes. But by offering a loan with low payments stretched out over
30 years, at a predictable, fixed interest rate, homeownership suddenly become
the 30-year fixed mortgage is still the most popular home loan. In fact, in a recent survey by the Mortgage
Bankers Association, adjustable rate mortgages made up only 5.2 percent of total
mortgage applications. It’s easy to understand why borrowers have been flocking to fixed-rate loans instead.
Rates today remain just above record lows at about 4 percent but are expected
to drift higher. If you anticipate staying in your house for many years, this
could be the last chance to lock in a truly excellent rate.
are at least two compelling scenarios when a 5/1 ARM makes sense: when rates
are high but expected to drop, or if you don’t expect to stay in your house for
more than five years.
why: The 5/1 ARM comes with a fixed rate for five years and adjusts annually
for the following 25 years. Because the borrower takes on more interest-rate
risk starting in year six, the lender gives the borrower a break, or teaser
rate, for the first five years. Right now, for instance, the average 30-year, fixed-rate loan comes
with a 4.04 percent interest rate, compared with just 3.46 percent for the
average 5/1 ARM.
does that mean in terms of monthly payments? Let’s say you buy a $250,000 house with
20 percent down. With a 30-year, fixed-rate mortgage, you’d pay $949.45 per
month. With a 5/1 ARM, you’d be out of pocket $893.63—or $55.82 less a month.
Over five years, you’d save $3,349. That’s a substantial amount.
the risk with a 5/1 ARM is that rates go up substantially and you
have decided you aren’t ready to move. Even if you’re not ready to sell for
another year or two, most ARMs place caps on interest-rate hikes.
your cap is, say, 2 percentage points per year, your rate could go up at most
from 3.46 percent to 5.46 percent, leaving you in year six with a higher
payment of $1,130.56—or $181.11 more than you would have paid monthly if you
had locked in a fixed-rate mortgage. After one year of higher payments, you’d
still be ahead in terms of total payments with the 5/1 ARM over the 30-year
fixed-rate mortgage. However, by year seven, you would need to sell or refinance at a lower rate—or you may
end up regretting that you didn’t lock in for 30 years.
By Kevin Channing - To
view the original article click here