Home News Should you consider an adjustable-rate mortgage?

Should you consider an adjustable-rate mortgage?

by admin
0 comment
Placeholder while the action of the article is loaded

Mortgage borrowers are considering lending options as mortgage rates have skyrocketed to levels not seen in more than a decade in recent weeks. About 11% of mortgage applications were for floating rate mortgages (ARMs) in the first week of May. According to the Mortgage Bankers Association — The share of ARM applications three months ago, when mortgage rates were low, almost doubled.

It was three mortgage lenders who sought advice on ARM. Brian Kos, Executive Vice President of Mortgage Networks in Danvers, Massachusetts. Tom Trott, branch manager of Embrace Home Loans in Frederick, Maryland. Kate Gurevich, Managing Director of FoundItHomeLoans, a division of Denver’s Cherry Creek mortgages. All three responded by email and their responses were edited.

Q: Q: Are more borrowers wanting ARM now? Are these repeaters, first-time buyers, or both?

Kos: Borrowers are now more open to ARM due to potential savings. The situation is different, but both first-time buyers and repeaters are interested.

trot: As it is related to floating rate mortgages and fixed rate mortgages, more buyers are definitely considering options. In my experience, most first-time homebuyers continue to have a 30-year fixed rate mortgage. Repeaters are more open to choosing ARM.

Q: Q: Why do borrowers want ARM when interest rates are rising? Don’t you worry about the rate going up too high?

Grevic: ARM may have an advantage even if it knows that the borrower does not own real estate for the normal 15 or 30 year period of a fixed rate mortgage.

Affordability of homes gets worse — but not everywhere, reports find

trot: If interest rates are rising, borrowers are more likely to consider ARM in the hope that interest rates will fall in the future. ARM is ideal for their financial planning, as some borrowers may know that they own (or raise money for) real estate for only 5 to 10 years.

Q: Q: What are the benefits of ARM?

Kos: ARM’s initial interest rates are low, such as 5, 7, and 10 years, so monthly mortgage payments are significantly less than 30-year fixed rate loans. Borrowers will usually earn more income by then, even if interest rates are adjusted higher in the future.

trot: ARM increases cash flow in advance due to the low interest rates associated with the fixed rate portion of the mortgage before the interest rate is adjusted. ARM allows borrowers to buy more expensive homes more comfortably with lower payments.

Q: Q: What are the drawbacks of ARM?

Grevic: ARM usually has lower interest rates than fixed rate mortgages. However, homeowners are subject to market volatility and unpredictable future interest rates. Significant rises in interest rates can lead to significant increases in consumer home payments, which can lead to financial difficulties.

Kos: No one knows what the price will be. If interest rates rise, the borrower may not be in the best financial position to handle higher payments.

trot: The disadvantages of ARM are related to the future uncertainty of the interest rate environment. If interest rates rise by 2% (4% to 6%) on a $ 500,000 loan, principal and interest payments will increase by $ 610 per month.

Q: Q: Briefly explain how ARM works.

trot: ARM is usually set with an initial fixed interest rate period of 5, 7, or 10 years. When the fixed rate period expires, the interest rate is usually adjusted every 6 months or every year.

Should You Co-Sign Your Adult Child’s Mortgage?

The new interest rate is determined by the published index and margin. If the index is 5 percent and the margin is 2.25 percent, the new rate will be 7.25 percent. There is an upper limit to how much the rate can be increased with the first and subsequent adjustments. In the above example, if the initial interest rate is 4.5% and the interest limit for the adjustment period is 2%, the new interest rate will be 6.5% instead of 7.25%.

Kos: For the first loan term (usually 5, 7, or 10 years), the fixed rate will be lower. Depending on the terms of the loan, at the end of that period, the rate could potentially increase by 2% per year, but not above 5% for the life of the loan. Prices may also drop. After the initial fixed rate period, new payments will be adjusted based on the remaining principal at that time. For example, interest rates can go up by 2%, but loan balances can go down by $ 40,000.

Q: Q: Any advice on who should consider ARM and who shouldn’t?

Grevic: ARM may be a good option if you know that the borrower will not hold the asset longer than ARM’s fixed rate period. Borrowers can opt for ARM if they are financially capable of withstanding large interest rate fluctuations and, in some cases, with significantly higher payments. Some borrowers also choose ARM if they strongly believe that the current trend of high and rising interest rates is unsustainable, interest rates will fall and refinancing will be possible in the future. However, most borrowers prefer the financial security of fixed-rate mortgage products.

trot: ARM is a viable option if you have good financial discipline. ARM can be financially dangerous if you have a large amount of debt that can increase over time. The borrowers that ARM best services are those who know that mortgages are in real estate only for the first fixed rate period. This scenario avoids future interest rate uncertainty.

You may also like