Over the last 12 months we have seen a decrease in adjustable rate mortgages (ARMs). The main reason for the decrease was that borrowers could obtain a fixed mortgage at the same or a better rate them ARMs. However, ARMs are now offering significant lower interest rates than their fixed counterparts. Currently a 5/1 ARM is averaging about 0.875% lower than a 30 year fixed.
Does the discount on ARM loans mean it they are the best choice at this time? It depends on your situation and goals. If you are planning on staying in your house for more than 5 years it probably doesn't make sense to take the lower rate. On a $200,000 loan you would save almost $110/month if you went with ARM loan, but you would have to refinance your loan to avoid your rate increasing. Therefore, you would save $6,594 over 5 years on your mortgage payment, but would spend $3,500 in closing costs to refinance and would be gambling that you could get a fixed rate as good or better than you could today.
There are also other factors that you would need to consider that may limit your ability to refinance such as; income and liabilities, real estate market, and changes in the mortgage industry. Many people have learned this lesson the hard way in the last 6 months. They were able to save thousands of dollars over a few years, but the real estate market changed or their income decreased and they were unable to refinance.
ARMs are still great options and can save you a lot of money, here are some situations when to consider an ARM:
Does the discount on ARM loans mean it they are the best choice at this time? It depends on your situation and goals. If you are planning on staying in your house for more than 5 years it probably doesn't make sense to take the lower rate. On a $200,000 loan you would save almost $110/month if you went with ARM loan, but you would have to refinance your loan to avoid your rate increasing. Therefore, you would save $6,594 over 5 years on your mortgage payment, but would spend $3,500 in closing costs to refinance and would be gambling that you could get a fixed rate as good or better than you could today.
There are also other factors that you would need to consider that may limit your ability to refinance such as; income and liabilities, real estate market, and changes in the mortgage industry. Many people have learned this lesson the hard way in the last 6 months. They were able to save thousands of dollars over a few years, but the real estate market changed or their income decreased and they were unable to refinance.
ARMs are still great options and can save you a lot of money, here are some situations when to consider an ARM:
- You plan on selling within the fixed term on the ARM
- You plan on refinancing or paying off the loan within the fixed term of the ARM
- You know you will be making more money in the next few years and want to purchase a house that will meet your future needs and an ARM will allow you to afford the house and you can refinance to a fixed rate mortgage within the fixed term of the ARM.
Before refinancing or purchasing you should always think about your immediate needs and future goals and plans before deciding on a mortgage program. If you need help with deciding which loan will be best for you please feel free to contact us.
Prosperity Financial - Your Mortgage Manger
Lafayette, Colorado
http://www.3bed2bath.net/ http://www.colomortgages.com/ http://www.myprosperityfinancial.com/
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