hello. Welcome to Financial Face-off. The MarketWatch column will help you consider your financial decisions. Our columnist will give her a verdict. Please let her comment if you think she is right.And please Share your suggestions For future Financial Face-off columns.
It’s a big deal for homebuyers. Median home prices in the US exceeded $ 400,000 for the first time (more precisely, $ 407,600, up 14.8% from a year ago. Latest numbers).What’s more, the cost of a 30-year fixed-rate mortgage is much higher, and interest rates are higher. 5.51%Increased from 2.88% a year ago.
Although there are signs that the real estate market is chilling, full cash offers and bidding wars have been common in the highly competitive housing market until recently. Buyers are under pressure and are making all sorts of concessions to get into their homes, such as skipping home inspections and abandoning other contingencies.
Floating rate mortgages are one of the strategies buyers have relied on to (temporarily) reduce their monthly home payments.It’s becoming more common Especially in the expensive housing market According to CoreLogic, San Francisco, San Jose, California, Bridgeport, Connecticut, and more.
Floating rate mortgages usually start at a lower than average rate and then higher or lower (depending on where the interest rate determined in the fluctuating market is when the adjustment is made and other factors). It is “adjusted” to the interest rate. Set period. For example, a 5/1 floating rate mortgage (ARM) changes interest rates once a year after 5 years. A borrower may borrow a floating rate mortgage if he thinks he will sell the house before the interest rate is adjusted.
ARM is fascinating. This is because borrowers initially pay less monthly mortgages than traditional 30-year fixed rate mortgages. Currently, the 5/1 ARM adoption rate is 4.35%, but the fixed 30-year rate is 5.51%.
So which makes more sense, a floating rate mortgage or a fixed rate mortgage?
“It’s amazing that people don’t know about mortgages,” says Ken Walzer, principal and co-founder of KCS Wealth Advisory in Los Angeles. He said he would ask clients considering ARM about two important numbers related to loans. Index and margin — And he will get a blank gaze accordingly.
In addition to understanding these numbers, borrowers thinking about ARM will first pay for how quickly payments go up, and perhaps most importantly, “pay monthly even if rates and payments go up.” You need to know if you can afford it. The maximum amount allowed in your loan agreement. ” According to the Consumer Finance Bureau, Federal Consumer Watchdog. (And keep in mind that mortgage payments are only a small part of the total cost of a home. There are also homeowner insurance and property taxes, and in some cases mortgage insurance and HOA fees. Ownership usually also requires repair and maintenance costs.)
“It’s very expensive and you may have to pay 10% in a year or two, so you have to be careful,” Waltzer said. “We need to know if that is possible.”
You may remember floating rate mortgages from the subprime foreclosure crisis that preceded the 2008 housing collapse and the Great Depression. ARM was popular with buyers trying to get some of the housing boom (which turned out to be a bubble). Experts told MarketWatch that lending standards were loose at the time, and even if they couldn’t afford to repay, the lender would approve the mortgage to the borrower. “In 2006, if we could cloud the mirror, we could get a loan,” Waltzer said. “Now you really need to qualify.”
Thanks to the borrower protection established by the Dodd-Frank Act, the risk of ARM today is low. National Center for Responsible Lending.. Dodd Frank required the lender to fully document the borrower’s income and assets, and the ability to repay ARM before the loan was made, and said the borrower would need to qualify for the loan. .. Fully indexed rateNot an introductory interest rate or a “teaser” interest rate.
Dodd-Frank was enacted over a decade ago, but its protection is valuable to remind you that when you take out a mortgage, it’s up to you, the borrower, to decide if the loan is right for you. Because it is a real thing.
Before acquiring ARM, the borrower must make sure that he or she fully understands certain details, such as the upper and lower limits of interest rates. This information is on the loan promissory note, but unfortunately most people haven’t read it, said Sara B. Mancini, a staff lawyer at the National Consumer Law Center. If you are a first-time purchaser HUD Certified Housing Counselor Mancini suggested while you were navigating this decision.
“This is a crazy market and I think people are under pressure to do things outside of what they can get and feel comfortable with. It’s because they succeed in owning a home. It’s not a good recipe, “Mancini told MarketWatch.
“Many people involved in this process have incentives to drive closing deals, so consumers need to protect their interests. All realtors and loan officers pay you home. Since they are paid a certain percentage of the price, their incentives are not financially consistent with saying “please come in at a lower asking price”.
If we learn something from a pandemic, it means that life is unpredictable. So is the economy, so is the interest rate. My vote is to go with a fixed rate mortgage.
With fixed-rate mortgages, ARM can make a difference, while allowing you to develop an overall financial plan centered on relatively predictable monthly home payments.
“It’s easy to be fascinated by the low ARM rates, and many will probably say,” What’s the chance of staying in this house 10 years after the rates start to fluctuate? ” .. However, this exposes buyers to interest rate risk that they may regret in the future, “said Ron Guay, Certified Financial Planner at Rivermark Wealth Management in Sunnyvale, California.
“Fixed rates save you the trouble of monitoring the rate environment and keep the cost of the largest billing information in a world where everything else will be more expensive (ie inflation) next year, protected from rising interest rates. And if interest rates fall (sufficiently), you can refinance, “Guay said.
He added, “ARM’s argument is to the nonsense that people anticipate higher rates and that it is another form of market timing (ie the loser’s game) before moving to fixed rates. It depends. “
Is my verdict best for you?
ARM, on the other hand, makes sense if you plan to sell your home before interest rates are adjusted, and if you think interest rates will go down (that is, your loan will be adjusted). Some people are comfortable making that kind of bet, while others are not.
Christopher Lyman, Certified Financial Planner of Allied Financial Advisor, said: LLC in New Town, Pennsylvania.
“Several clients have categorically insisted on moving out of this house in the next few months or years, so we adopted ARM knowing that if everything went according to plan, this would be a cheaper option. But what we are worried about is when they weren’t expecting the most, and because they stick to this ARM and pay significantly more interest over the life of the loan. If you can’t refinance after signing up, life is about throwing a curve ball. “
Here’s an example of how this works for a $ 440,000 loan, according to Lyman.
A 5.5% fixed rate 30-year mortgage means a monthly payment of $ 2,500 and interest of $ 460,000 paid over the entire term of the loan.
ARM in 30 years is currently 4.75% and will be adjusted to 6.75% in 5 years. From now on, during the loan period with a maximum interest rate of 7.7%, interest rates may rise by up to 1% per year. This means that your initial payment will be $ 2,300 per month and will be $ 2,800 over the next five years. In the sixth year, at a maximum rate of 7.7%, your monthly payment will be $ 3,000. Assuming the above scenario, in the sixth year, if the interest rate for the remaining term of the loan remains 7.7%, the total interest paid over the entire term of the loan will be $ 600,000.
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