This Article is About
good question
period of time
good time
perspective
ARM Mortgages: Are They Worth It?
Join 1000's of Authors at StreetArticles Today!

If you have listened to the media recently or opened a newspaper, you know that interest rates are at historical lows right now. As I right this article, it is possible to get a 30 year fixed loan in the high 3's! Wow! If you are considering buying a home, or refinancing, now would definitely be a good time to do so from an interest rate perspective.

So why would ANYONE consider doing an adjustable rate mortgage when fixed rates are so low?  After all,  with a fixed rate you never have to worry about the payment changing on you. It is a good question and the reality is that many people should not consider it. If you know you are going to be in your home for an extended period of time, and are unsure of what your future holds, then a fixed rate is likely the best option for you.

Not everyone is in the same situation though. Again, as I write this article a 5 year arm is available in the mid to high 2's as opposed to the high 3's on a fixed rate. Here is an example:

$300,000 loan

3.75% 30 year fixed: $1389 per month

2.75 5/1 arm: $1224 per month

That is a savings of $165 per month or just under $10,000 over 5 years! That is fairly substantial.

So why do an arm? There is really only one very compelling reason to do an arm.  It is if you are confident you will be moving to a new home or relocating within the period of your arm where the interest rate can't change. For example, on a 5 year arm, that is 5 years. You cant take a fixed rate with you when you pay the mortgage off or sell your home! So, if you know you will be going elsewhere is the next 2 years, 3 years, 5 years or even 7 or 9 years, there may be an arm product that makes sense for you!

A mortgage where the interest rate is fixed for a certain period of time before it is able to adjust is known as a hybrid arm and those are by far the most popular arms because they allow you to get a fixed rate for a period of time but not necessarily for a full 30 years when you very well may not need that same mortgage for 30 years. The most common examples are 3 year arms, 5 year arms, 7 year arms, and 10 year arms. On a 7 year arm, your initial interest rate will be locked in for 7 years before it can change! That is a long time and may be more than enough time to meet your needs if you know that your life will change and bring you to new places within that amount of time. A 10 year is even longer! If you knew in 6 years for example you planned to move to a new state and you were fairly certain of it, why would you pay a higher rate to lock in your payments for 30 years? You would be paying a premium for time you dont need.

So, what happens after that fixed period? Your loan can adjust based on the market. Most hybrid arms these days are expressed as the fixed period/change frequency. For example, you may be able to do a 7/1 arm. That means it is locked in for 7 years and then can change one time per year every year thereafter. It doesnt mean it must go up, only that it could. I have an arm loan right now that is 3 years into adjustment and it has only DECREASED!

What will it adjust to? Normally what determines your new interest rate after your locked in period is an margin plus a specific financial index. It works much like your credit card which is likely prime + something (like 10). Your arm mortgage will be a margin (like 2 or 3 for example) plus whatever index you are tied to. The most common indexes are the libor and the treasury. You may even hear it expressed that way including as a 5/1 libor for example. This means it is a loan that is locked in for 5 years and can not change, then can change once per year to the libor plus whatever the margin you have on your loan is. If the libor is 3%, and your margin is 2, then your rate would adjust to 5%.

One final technicality to understand is that there are usually caps that control how much your loan can actually adjust. One common one is a 2-2-6. These 3 numbers are knows as the initial cap, the periodic cap, and the lifetime cap. That means that the very first adjustment your loan can not increase by more that 2% over your intiial interest rate (the initial cap). Then, it can't increase by more than 2% any adjustment period after the intitial adjustment (the periodic cap). Finally, it can never increase more than 6% above your initial interest rate for the life of the loan (the lifetime cap). So, while a 6% increase is substantial, that is the absolute maximum it could ever go up and that wouldn't even be an option until year 8 on a 5 year arm (because year 6 would be capped at a 2% increase, and year 7 would be capped at 2% above that). These 3 caps are often expressed in the name of the product. A common example of this is a 5/1 LIBOR 2-2-6, or 10/1 TREASURY 5-2-5, etc.

There are definitely benefits to an arm and especially a hybrid arm for those that feel certain that their future will hold a change in their life. Using an arm can save you thousands of dollars while still giving you the security of a fixed rate for a pretty long time. Just make sure you ask the following questions:

1) What is my margin? (this will be added to the financial index when the loan is able to adjust)

2) What is my index? (probably the libor or treasury. This will be added to the margin when the loan is able to adjust. Research the history of the index so you understand what it looks like over a period of 20 years or so)

3) What are my "caps?" (how much can it change year one, each year after, and over the life of the loan)

Then, just compare the savings between one of these options and a fixed rate. If it makes sense, go for it! But, only if you are comfortable with it and it makes good financial sense for you.

 


Street Talk

No comments present
You May Also Like
What is the fastest way to lose belly fat - Good question!
What is the fastest way to lose belly fat? That is a good question unfortunately, most of the techniques shared out there are not only unhealthy but also very unsafe. I mean you could take diet pills filled with all kinds of garbage that give you energy that make you…
By: Travis in  Health and Fitness  >  Weight Loss   Jul 25, 2011  
0
  Likes: 0

Some Questions to Consider If Your Boyfriend Wants You Back
Relationships do not always go as planned and although everyone that get involved in hopes to have one that comes out of fairy tale, there are times that they can just turn out to be a nightmare. For your boyfriend to want you back, it means both of you have…
By: A. B. Sahu in  Relationships  >  Conflict   Oct 21, 2012  
0
  Likes: 1

How To Use Plr Content To Make the Most Of Long Tail Keywords
Have you noticed that on some of your websites, more traffic is generated from long tail keywords as opposed to the main keyword of the site. Some of my own websites bring in a lot more traffic through those long tail keywords. The question is then, how to make the…
By: Molly Saker in  Writing and Speaking  >  Writing Articles   Apr 16, 2012  
0
  Likes: 1

Self Help For Relationships – Good Or Bad?
You might be feeling that your relationship is perfect. The two of you just don’t fight and life couldn’t be better. I mean, it should be made into a blockbuster movie, right? Haha, right! Nobody has a relationship like that. If you think yours is that way you might consider…
By: Lacey Wolf in  Relationships  >  Reconnecting   Jul 01, 2012  
3
  Likes: 1

Can I Get My Ex - Girlfriend Back?
If you are asking that question, then you obviously have some doubts, and rightfully so. Well you are going to have to ask and answer some tough questions. First of all...have you figured out what caused the breakup to begin with? Was it you...was it her...probably a combination of both...right?…
By: Stbrac1 in  Relationships  >  Reconnecting   Dec 26, 2011  
15
  Likes: 2

If Love Is So Great, Why So Many Unions Turn Into Hate
Very good question. I am a firm believer that most answers pertaining to man’s behavior can be somehow traced to his early beginnings. Man is aware that he needs food for survival. When man begins to realize that some foods really taste good, said food is no longer used for…
By: ed smith in  Relationships   Mar 23, 2012  
0
  Likes: 1

Is My Boyfriend Afraid Of Commitment – Or is it Just Commitment With Me?
Insecurity is a terrible thing to suffer from in a relationship. It's hard to avoid though when your boyfriend seems to turn tail and run hard and fast in the other direction whenever the dreaded "C" word aka "Commitment" comes up. It may not be much help for your self-esteem…
By: T Dub Jackson in  Relationships  >  Commitment   Apr 17, 2011  
0
  Likes: 3

How to Determine If A Work Published Outside the United States Is In the Public Domain
In a previous article I discussed how to determine if something published within the United States is part of the public domain. Here's a question: What if it's not? The first one is easy. If it was published prior to July 1, 1909, it is in the public domain in…
By: Bob Moore in  Home Based Business   May 06, 2011  
0
  Likes: 0

Making Mortgage Pre - approval Process Easy
Summary Discover the use and benefit of getting a pre-approval for your mortgage and why it is essential to work with the experts in this field. Body As a customer, one is always looking for faster and easy approval of mortgage. However, things can get confusing, especially if one is…
By: MarshRobert in  Finance  >  Home Equity Loans   Nov 15, 2013  
0
  Likes: 0

Current Home Equity Loan Rates
Current home equity loan rates change when interest rates go up and down, usually in line with how Federal Reserve effects changes to their lending rates. The range of Current home equity loan rates change from one lender to the next. You need to calculate the Current home equity loan…
By: Anna Maria Ferramosa in  Finance  >  Home Equity Loans   Jan 03, 2011  
0
  Likes: 0

Home Equity Loan Interest Rate
Home equity may be the best way to borrow if you are a home owner. By using the equity you have, you can borrow for various purposes such as buying new cars, holidays, refinancing high interest debt and so on. There is lower home equity loan interest rate than any…
By: Anna Maria Ferramosa in  Finance  >  Home Equity Loans   Jan 03, 2011  
0
  Likes: 0

Home Equity Line of Credit
A home equity loan line of credit is a type of revolving credit whereby your house serves as collateral. Due to the fact that a home is a consumer's valuable asset, a number of home owners use home equity loan line of credit for major things like home improvements, education…
By: Anna Maria Ferramosa in  Finance  >  Home Equity Loans   Jan 03, 2011  
0
  Likes: 0

An Ex-mortgage Brokers Point Of View
The market crashed in 2007, I know I felt it, that was the year I had to close down my Mortgage Company. I know that many Mortgage Brokers out there, (Correction: Ex-mortgage Brokers, because today we are almost non-existent, thank you Wall Street Guru’s.) Anyway, I know that the mortgage…
By: Heidi Castro in  Finance  >  Home Equity Loans   Sep 07, 2011  
0
  Likes: 6

Settle Your Business With Mortgage Finance
While Dubai boasts a bustling business all year round, expats are always on the look-out for new homes. There are expats in Dubai who are moving to bigger homes, or new expats who have just moved to settle in Dubai. Either way, mortgages and home financing are quite a popular…
By: Karen Thornalley in  Finance  >  Home Equity Loans   Jan 21, 2016  
0
  Likes: 0

Comparing the Fixed And Adjustable Mortgage Rates
Summary Compare fastened and adjustable RBC mortgage rate and their execs and cons before creating your mind. Understand your financial goals to make the best choices. Body Typically speaking, one can encounter mortgage rates that stick with it for 15-, 20-, 30- and 40-year terms. Once discussing RBC mortgage rates…
By: Addy Scott in  Finance  >  Home Equity Loans   Jan 08, 2014  
0
  Likes: 0

Article Views: 1569    Report this Article