Best Mortgage Rates: Give ARMs a Hand

Posted by  on Apr 27, 2010

"Fixed-rate lending has dominated the home mortgage market over the past year because of the 50-year low interest rates for this product and the comfort that fixed-rate principal-and-interests payments assure the consumer," Freddie Mac chief economist Frank Nothaft told the Washington Business Journal.

That's true--with 30-year fixed-rate mortgages still offering interest rates of about 5%, there seems little reason to bother taking on the risk of an adjustable rate mortgage. Interest rates have nowhere to go but up, and legitimate concerns about inflation make fixed rates especially attractive. Financial planners agree that one of the best hedges against inflation is a fixed rate mortgage.

So Why Bother with an Adjustable Rate Mortgage?

A large group of homeowners and home buyers can benefit from buying or refinancing with ARMs. According to the National Association of Realtors, the average home in the U.S. is retained for about seven years before being sold. Younger buyers are more likely to sell their homes sooner and move up to larger dwellings. According the the National Association of Realtors, first-time home buyers only keep their properties an average of 4 years. So why not choose the best mortgage rates possible if you're not going to keep your home for thirty years anyway?

How Much Can You Save with an Adjustable Rate Mortgage?

Hybrid ARMs like a 3/1, fixed for three years, or a 5/1, fixed for five years, carry interest rates of 1% to 1.25% lower than 30-year rates. Once these loans convert to ARMs, the amount that your interest rate can increase is limited by interest rate caps. On a $200,000 30-year fixed-rate home loan at 5%, your monthly principal and interest payment is $1,074. By choosing a 5/1 hybrid at 4%, you can have a payment of $955. You'd save almost $120 a month, $7,200 in five years, just by choosing a more appropriate loan. For short-timers, a 3/1 at 3.75% gets you a payment of $926, $148 a month less than the fixed rate payment, a savings of $5,328 in three years. Use that to prime your retirement accounts, pay down high-interest credit card debt, or take a bite out of your student loans.

Getting the lowest mortgage rate is important, and can save you a lot of money over the life of a home loan. But it's even more important to choose the right mortgage for your circumstances.


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