What exactly is an ARM? There isn’t any kind of interest rate known as a LEG, at least not as far as I’m aware, but an ARM is an adjustable-rate mortgage. Especially lately, rising interest rates added to increasing home prices are causing the affordability factor of owning a home to be quite the issue for many buyers. To keep those payments low, you may not have to give an arm or a leg, but more buyers are considering getting an ARM.
Here’s a neat fact – mortgage rates are currently at their highest point since 2009. “While housing affordability and inflationary pressures pose challenges for potential buyers, house price growth will continue but is expected to decelerate in the coming months.” said Sam Khater, Freddie Mac’s Chief Economist.
We all know I like to provide stats – and here are some great ones for you. A $400,000 home with 10% down payment and a 30-year term has the choice of a 5.27% fixed-rate or 3.96% for a 5/1 adjustable-rate mortgage. The principal and interest payment will be $1,992.40 for the fixed-rate and $1,710.40 for the adjustable rate saving the buyer $281.99 per month for five years.
Looking for additional savings? You’ve found it. There is an additional savings for the buyer choosing the adjustable-rate mortgage because the unpaid balance at the end of the five-year first period is $6,429 less than the fixed-rate. The total savings to the buyer on the adjustable-rate during the first period is $23,348 or $389.13 per month for sixty months.
So at the end of the first period, the rate on the mortgage can adjust according to the then current index plus the margin subject to the caps as specified in the note. These are safeguards in place which remove the control from the lender or servicer from randomly raising the rate.
What exactly are those safeguards? They simply restrict the payments from going up more than a certain amount at each period or overall, for the life of the mortgage. A common cap/safeguard might be that it cannot adjust more than 2%, up or down, at any given adjustment period or 6% above or below the initial note rate.
Here’s a little more of a scoop on adjustable-rate mortgages (ARM’s) – they must adjust downward if the index indicates a reduction at the anniversary of the adjustment period. The overall trend has been lower rates for the past thirty years until recently.
There are Adjustable Rate Comparison tools you can use online to help you project a breakeven point, which will determine at what point the ARM would be more expensive than the fixed-rate, assuming a worst case situation where the rates would increase the maximum at each period.
It’s always good to be aware and even more cautious of your available options when financing a home. Make your own comparison using our ARM Comparison. Current interest rates can be found on Freddie Mac.
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