A call to ARM’s

ARM’s, or Adjustable Rate Mortgages, have been given a bad name over the past couple of years with horror stories of borrower’s loans resetting and their payments going up and then they are not able to afford the payments.  However, there are many kinds of ARM’s and the ones that have been the problems have been the Sub-prime ARM’s and Option ARM’s. Conventional Adjustable Rate Mortgages, such as those backed by Fannie Mae and Freddie Mac, have been performing well, and in fact if you financed your home with an ARM in 2005 and it’s about to reset, chances are your interest rate is going to go down a full point or more right now.

This is because the indexes many Conventional ARM’s are based on have decreased.  In fact, the 1-Year LIBOR Index, that many Conventional ARM’s are based is much lower today than it was five years ago.

In August of 2005 the average 30-year fixed rate mortgage was 6.00%. The average 5-year ARM (fixed rate for five years) was 4.875%.  The median price of a home in Salt Lake County is $224,500.  On a loan of this amount, had chosen the ARM back in 2005 not only would you have saved $9,475 in monthly payments since you closed your loan, but your interest rate would be resetting from the 4.875% to 3.00% this month.

So you can see not all ARM’s are bad.  When used in the right borrower situations they can save thousands of dollars a year in monthly payments. The key is in thinking through your long-term plans with the house: Are you going to live there for 30 years and never refinance? Are you only going to be in that house for only 3, 5, 7 or 10 years before you move? Sometimes an adjustable rate mortgage is the right choice.

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