Posts Tagged ARM

Why an ARM may be a better than a fixed-rate mortgage

I read this article today and I agree with it wholeheartedly. Sometimes an ARM is the best choice for your mortgage and financial plans. For instance if your plans to live in a home are just for another five, seven or ten years than many times an ARM can save you tens of thousands of dollars in interest payments over the years. Here are some quick quote from the article:

Assuming a $300,000 loan amount, a 30-year fixed-rate mortgage at 5.13% means a monthly payment of $1,634, said Keith Gumbinger, vice president of HSH Associates, a publisher of consumer loan information. Interest paid after five years: $74,053.

Compare that to a 5/1 hybrid adjustable-rate mortgage at 3.83%. For the first five years, the monthly payment would be $1,403, and you’d pay $54,771 in interest over those five years, Gumbinger said.

So, for a borrower who plans on moving within five years anyway, they’d save as much as $19,283 by financing with an ARM. For the examples, Gumbinger used HSH’s four-day cumulative rate averages from Feb. 7 through 10.

In the above example the borrower would save $10,954 a year in mortgage payments, money that could be used to pay-down other debt, added to the monthly mortgage payment to pay down the balance quicker or add to a retirement fund.

And this about the end of the fixed period of an ARM:

“It’s certainly worth saying that many borrowers overpay or overbuy the security that they need,” Gumbinger said. But “unless you can say with certainty where you will be in five years, you will have a little level of discomfort about what could occur” if you accept an ARM, he said.

That’s because — in the case of the 5-year ARM — the rate will reset at month 61, adjusting to market conditions. If, say, that ARM reset three percentage points higher (a hypothetical, since it’s unknown by how much it would reset) that would could mean a new monthly payment about $480 higher, Gumbinger said.

But if the savings from taking the 5-year ARM over the 30-year fixed-rate mortgage is banked and used for when the rate resets (again assuming that three percentage point hypothetical increase) you’d feel no budgetary stress from the payment increase for about 40 months, he said.

And if you do choose an adjustable mortgage, prepare in advance for the end of the fixed-rate period by socking money away in order to comfortably handle a possible increase in monthly payment when it hits. That, or use the savings toward paying down the principal so when the mortgage resets you have a smaller amount to pay interest on.

You can read the whole article here.

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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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Salt Lake City Mortgage Market Update for November 20, 2008

Yesterday the minutes from the Fed’s October meeting were released.  The minutes expressed concern over the health of the economy and targets for employment and economic growth were lowered.  The big news though was that after years of being concerned about inflation, the Fed is now saying they are concerned with deflation.  The news shocked the financial markets and directed a huge flow of money into uber-safe Treasury Notes.

We are seeing problems in available credit being offered to consumers right now, and deflation is when prices drop due to decreased in the supply of money and credit.  When this happens typically investors run for fixed instruments like Bonds because the fixed rate of return will buy them more goods and services over time.

The last time this happened was in 2003 when Alan Greenspan mentioned deflation.  Mortgage bonds rallied due to investors seeking safer places for their money, which in turn dramatically dropped mortgage interest rates and set-off a refinance boom.  We could see this again.

Right now Mortgage Bonds are holding their own and interest rates are stable if not getting a little better.  So for now I recommend floating if you are in the process of refinancing or buying a new home.

In the “I said it here first” column, Forbes released an article yesterday saying that the mortgage reforms and new programs put in place by the Federal Government have only helped a fraction of those they said it would when they were selling them to you and I.  I said it a while back, these reforms and programs to help homeowners were more of an election year “Look what I’m doing for you, now vote for me” song and dance than real, helpful policy.  According to Forbes, the FHA Secure program initiated in August of 2007 that was to help more than 400,000 home owners over 3 years has only actually helped 4,000.  That’s far off from the 133,000 per year it was supposed to help. It comes as no surprise that they are now going to spend millions of dollars to figure out what went wrong so they can fix it.

Why is this?  First, In my opinion it’s because we have Congressmen who do not understand the first thing about a mortgage other than having one of their aids write the checks to pay the mortgage for their seven homes, making policies regarding your mortgage.

Second, the very people the FHA Secure program was aimed at helping can’t qualify for it.  This is because rich Congressmen have no idea what Joe Q. Public goes through on a daily basis.  They have no idea what it’s like to have to decide whether to pay the electric bill or buy groceries for your family.  So they make policies that have little relevance to Main Street America, but sound good when they are pandering to their constituents for reelection.  Remember how many Congressmen came out last year pronouncing how they were going to single-handedly clean-up the mortgage industry and save your home?  Yup.  They’ve done a good job.

For Salt Lake City, UT this morning’s mortgage rates are as follows:

30-year fixed: 5.625%

15-year fixed: 5.375%

Jumbo 30-year fixed: 5.75%

5/1 LIBOR ARM 5.75%

FHA 30-year fixed: 6.000%

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