NMLS: 2576 | CT LICENSE: 1101 | MA LICENSE: LS2576 | MI LICENSE: FR0023580 For August, it has been a hot topic to discuss the surge of adjustable rate mortgages (ARMs) experienced over the summer. According to Businessweek, 16 percent of all June 2013 mortgage requests were for ARMs – the highest since 2008. Factors fueling the interest, the piece cites, range from changed attitudes to lower rates compared with 30-year fixed mortgages to more people planning to sell properties in a few years.
But just a few weeks later, a press release from Bankrate.com revealed that interest rates for both fixed and adjustable rate mortgages jumped in recent weeks. As of August 22, interest on five-year ARMs moved up to 3.69 percent (up from 3.61 percent the week before) and the rate for seven-year ARMs was 4.07 percent. Interest on 30-year, fixed-rate mortgages, however, was 4.88 percent.
At the same time, basing your decision to take out an ARM should never be on the initial interest rates; in fact, many unscrupulous mortgage services use low rates as teasers to hook borrowers, who find out that payments quickly and drastically surge upwards in just a few years. So, if an ARM seems like a good deal in this market, consider the following factors before making a formal commitment:
1. Interest changes in relation to an index. Borrowers, depending on program and the index (CMT, COFI, or LIBOR), may see payments go up, the payments may stay the same, the borrower could end up owing more than the initial amount, or the mortgage may prove to be a better deal over time than fixed programs. The fact is, going with an ARM is always a gamble and often proves to be unpredictable over time, with caps, adjustment periods, and margins all influential factors.
2. Not all programs are the same. Although ARMs tend to last 30 years, options range from straight ARMs to hybrid mortgages that combine fixed and adjustable characteristics to interest-only loans. Certain options may be more prone to negative amortization than others, however.
3. How long do you plan to live in the property? For borrowers expecting to stay in the home no longer than five to seven years, ARMs prove to have many advantages. However, 30-year, fixed-rate mortgages offer more benefits to borrowers expecting to stay longer.
Although it’s advised that borrowers consider all three factors before deciding between a fixed-rate or adjustable-rate mortgage, lenders like McCue are required to inform every individual of an ARM’s terms and conditions, rates and changes, caps, monthly payment limits, and negative amortization.