Posts Tagged Fixed rate mortgage

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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Mortgage rates hit new record lows

Mortgage rates are at all-time lows, there is not doubt about that. It’s a great time to buy and contrary to popular belief, it’s not hard to qualify for a loan if you can prove your qualifying income via W2’s or tax returns.

Freddie: 30-year fixed-rate mortgage at record low

Treasury-indexed ARM rates more than a percentage point lower than a year ago

By Ruth Mantell, MarketWatch

WASHINGTON (MarketWatch) — The 30-year fixed-rate mortgage has hit a record low, ticking down to an average 4.57% in week ended July 8, compared with 4.58% in the prior week, Freddie Mac reported Thursday.

To obtain the latest rate, the mortgage required payment of an average 0.7 of a point. A point is 1% of the mortgage amount, charged as prepaid interest.

The year-ago average for the 30-year fixed-rate mortgage stood at 5.2%.

Read the rest of the story here: Mortgage rates hit new record lows Mortgages – MarketWatch.

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