Mar 25

ARMs Can Help You Save, But Carry Risks

The typical home buyer could save $260 per month with an adjustable-rate mortgage over a 30-year fixed-rate mortgage, or more than $15,000 in five years, a new study from Redfin shows. That marks the largest savings since at least 2015.

A 5/1 ARM means the interest rate is fixed for the first five years and then adjusts once a year for the remainder of the loan term, usually 30 years. ARMs that first reset in seven years or 10 years also are common. The 30-year fixed-rate mortgage keeps its interest rate for the life of the loan.

But ARMs can be risky: When the rates reset, borrowers can face significantly higher payments if rates rise significantly. Also, with certain types of ARMs, borrowers can face fees or penalties if they refinance or pay off their loan early.

“Adjustable-rate mortgages can work really well for home buyers who plan to stay in their home for less than five to 10 years and have the means to cover higher payments when the loan resets,” Arnell Brady, a senior loan officer at Bay Equity Home Loans, said in the Redfin study. Brady noted that up to 30% of his clients are now requesting ARMs.

The 30-year fixed-rate mortgage averaged 5.25% last week while the 5-year ARM averaged 4.08%, Freddie Mac reports.

A year ago, borrowers saw 30-year rates at just 3%. The increase in rates is adding significantly to costs. For example, new-home buyers who signed a contract to purchase a home a year ago when rates were 3% or lower are finding themselves caught off-guard as they go to close. They may face increases of hundreds of dollars on their mortgage payments.

In mid-May, the National Association of REALTORS® reported that monthly mortgage payments had increased by about $520 since the first week of January, when rates averaged 3.2%.

©National Association of REALTORS®
Reprinted with permission

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