By Doug Goelz, Mortgage Services
When considering a mortgage, one of your first decisions will be whether to get a fixed rate mortgage or an adjustable rate mortgage (ARM). With fixed rate mortgages, the interest rate and monthly payment for principal and interest are the same for the entire term of the loan (typically 30 years). With an ARM, the rate is fixed for a number of years at the beginning of the loan (say, the first 5, 7, or 10 years), and then adjusts annually for the remainder of the loan. The rate adjusts according to market rates at the time of the adjustment, and there are limits on how much the rate can adjust.
Until the election in November 2016, mortgage rates were so low on fixed rate loans that I always counselled borrowers to get a fixed rate loan. The monthly savings from an ARM just didn’t seem worth it compared to the very low fixed rates.
Now, market rates have moved a little higher, but the start rates on ARMs typically are much lower than fixed rates. So, ARMs can give borrowers lower monthly payments for the first several years of the loan. Particularly for jumbo loans (loans over $636,150), rates on 10 year ARMs (where the rate is fixed for the first 10 years of the loan, and then adjusts annually for the last 20 years) can mean savings of hundreds of dollars a month in a mortgage payment for the first 10 years compared to a fixed rate loan. Of course, borrowers with ARMs also have to face the specter of higher interest rates and payments when the loan finally adjusts after the initial period.
Here are several circumstances where you might consider an ARM:
- This is probably the most important consideration: you are comfortable with the uncertainty of future interest rates and the possibility that your mortgage payment may rise in the future. No sense in getting an ARM if you are going to worry about potential payment increases in 5 or 7 or 10 years
- You think you will sell the property within a certain number of years because, for example, you will want to move up to a larger, nicer place, or move out of the area.
- You are early in your career and anticipate an increase in income that will allow you to handle potentially larger mortgage payments in the future.
BTW, ARMs offered these days are different than many of the loans that contributed to the mortgage crisis of 10 years ago. With fully amortized payments, specific periods when the rates and payments can adjust, longer initial fixed rate periods, and caps on interest rate adjustments, ARMs these days are less risky than ARMs that helped create the mortgage crisis.
Questions? Feel free to get in touch with me at 415‐730‐4665 or [email protected]
