Experts say that if you are likely to move in five to seven years, and the residence you are looking to buy won’t be your ‘forever home,’ an adjustable-rate mortgage may make a lot of sense.
20-Sep-22 – The rapid escalation of mortgage interest rates over the past few months has left thousands of young Chicago home buyers wondering if they ever will experience the American Dream of homeownership.
On September 8, Freddie Mac’s Primary Mortgage Market Survey reported that benchmark 30-year-fixed home loans nationwide rose to an average of 5.89 percent, up from 5.66 percent, and only an eyelash away from the lofty 6 percent level. A year ago, a 30-year-fixed loan averaged only 2.88 percent.
There is another road to homeownership – the affordable adjustable-rate mortgage (ARM).
Freddie Mac also reported on September 8 that borrowers who choose a 5-year Treasury-indexed hybrid ARM could lock in a mortgage with an average interest rate of only 4.64 percent. That’s a hefty savings of 1.25 percent, cutting hundreds of dollars off the monthly payment.
An ARM typically starts with a fixed interest rate for a set period of time, and then adjusts at intervals. ARMs come in different options in which the interest rate is set for three, five, seven, or ten years.
After the initial fixed-rate period, the rate can adjust in six-month or 12-month intervals depending on market conditions. The adjustments are based on an index, such as Treasury yields, and the lender’s profit margin also is tacked on.
If a home buyer takes out a five-year ARM, the interest rate is locked for that initial period. After five years, the rate can adjust with the index rate every year thereafter.
ARMs are a roll of the dice
Consumer advocates say borrowers should worry that interest rates may go up over time, and that would mean payments could increase – or negative amortization could occur, causing the loan balance to grow. However, rates also can go down over time. When that happens, it might be a good idea to refinance and lock in a fixed-rate loan.
Experts say that if you are likely to move in five to seven years, and the residence you are looking to buy won’t be your “forever home,” an ARM may make a lot of sense.
“Not only are mortgage rates rising, but the dispersion of rates also has increased, meaning that borrowers can benefit from shopping around for a better rate,” Khater advised. “Our research indicates that borrowers could save an average of $1,500 over the life of a loan by getting one additional rate quote, and an average of about $3,000 if they get five quotes.”
Affordable fixed loans available, too
Chicago-area borrowers who move quickly still have a faint chance to lock in the following bargain rates as of September 9, reports RateSeeker.com.
• Mutual of Omaha was quoting 4.933 percent on 30-year loans with a 20 percent down payment, and 4.375 percent on 15-year mortgages with a 5 percent down payment. Borrowers also will pay a $850 loan fee, plus points, or 0.25 percent of the loan amount.
• First Savings Bank of Hegewisch was quoting 5.105 percent on 30-year loans and 4.450 percent on 15-year mortgages with 20 percent down payment and a $615 loan fee.