Advantages Of A 5 Year Adjustable Rate Mortgage (arm) [mortgagerefinance-101.blogspot.com]
www.peterkinch.com Feb 29, 2011 - Low rates continue to dominate the headlines as a Senior Economist from BMO indicates that the Canadian Housing market may be in a baloon but not a bubble. And speaking of rates, find out why you might want to have your mortgage renew in 2016 rather than 2017. And lastly, a reminder that I am returning to Ontario to do a live 5 Year Plan Workshop for the first time in almost 5 years. Ottawa Freb 18th.
mortgagerefinance-101.blogspot.com The Mortgage Minute - Ongoing Low Rates means No Bubble
Adjustable rate mortgages (ARMs) have received some negative attention in recent years as many people found themselves unemployed or without enough equity left in their homes in order to refinance. However, in the right scenarios, an adjustable rate mortgage offers rewards in terms of potential lower short term interest rates.
An adjustable rate mortgage is a loan that has a fixed introductory interest rate for a relatively short period of time - typically from 2 to 10 years depending upon the product - after which time, the mortgage adjusts up or down based on the loan"s margin, caps, and the index which the loan is tied to. Generally, the fixed interest rate for the defined period of time is lower than traditional 15 to 40 year fixed rate mortgage products.
There are risks and rewards when it comes to considering a 5 year adjustable rate mortgage (ARM). The advantage is that you can save money by locking in a lower interest rate for the first five years. Rates tend to be lower the shorter the introductory period of an ARM, so a 5 year ARM would have a lower interest rate than a 7 year ARM. Plus, it may be possible to make additional principal reduction payments monthly or quarterly to try and shorten the life of the loan. Saving money with an ARM by having a lower interest rate for the fixed introductory time period may enable you to make those additional payments.
The risk of having an adjustable rate mortgage comes with the indeterminate nature of the interest rate after that fixed period. If you had an ARM in the early 2000's, you may have found yourself with an even lower interest rate once the ARM adjusted. However, if you had an adjustable rate mortgage in 2009 when many housing markets collapsed, you may have found yourself upside down in your mortgage without the ability to refinance out of the adjustable rate product. This could spell serious trouble for you if the indexes which the loans are tied to begin to increase.
One instance where a 5 year adjustable rate mortgage may make sense is if you know you likely won't be in your home for longer than five years. Then you may wager that you'll close out your loan before it can adjust to a potentially higher rate.
When considering the advantages of a 5 year ARM, it's important to think about the length of time you may live in your home, your current and projected future income, your ability to pay a higher monthly mortgage payment if the 5 year ARM adjusts to a higher rate before you close it out, and the savings you can achieve while paying lower interest rates during the fixed period.
It is strongly recommended that you consult with a mortgage and tax professional when weighing the risks, rewards, and advantages of a 5 year ARM. While an ARM can help save money in the short term, it's important to have a long term plan when choosing an adjustable rate mortgage. A licensed mortgage loan officer can help you understand the implications of choosing a 5 year ARM.
Related Advantages Of A 5 Year Adjustable Rate Mortgage (arm) Topics
Question by ssk402000: I have a 5 year ARM mortgage and i need advice on refinancing to a fixed rate mortgage? When I bought my house it was worth 291,000 where I made a down payment of 20,000 and now I am having an appraisal getting done and with the housing market as it is, i'm sure its worth much less. I originally had a 5 year ARM mortgage at a 5% rate but am now looking to refinance to a longer fixed rate mortgage. What are my options? Best answer for I have a 5 year ARM mortgage and i need advice on refinancing to a fixed rate mortgage?:
Answer by Biggie @ Arbor Mortgage
You may be fine putting 20k down on the loan, but how long have you been in the home? Is it @ the 5 year mark? You should consider an FHA 30 year fixed because they will refinance your home up to 97.75% of the value for a rate & term mortgage.
Answer by Orange County Sheriff
If you have enough time left on the mortgage, you could ride it out until the market comes back. Not really able to give advise unless we know how long ago you purchase the home, what the current value is. With an assumption you purchased the home with in the last year, and you're in a declining market, you're probably up side down. 5% rate is a great rate. If you can wait out the market, wait it out.
Answer by David Beasley
Call your mortgage servicer. The LIBOR index is DOWN. Your rate may not adjust UP! Or not very much. Find out what the current MARGIN and INDEX are on your current mortgage. As long as the LIBOR stays low (which won't be for more than say 2 years) it might be better keeping your current mortgage. It may not be worthwhile to pay refi closing costs to get a somewhat higher fixed rate. Today's rates are 6.5% 30yr fixed on FHA 97.75% refis today (600+ credit). Best of luck!
