As many of you know, rents have climbed nationwide, while mortgage rates have fallen significantly. According to Freddie Mac, 30-year conventional mortgage rates are the lowest they’ve been in at least three years; and rates for FHA and VA mortgage rates have averaged even lower.
For many buyers, though, the 30-year mortgage is a wasteful choice. There are more logical, “less expensive” options to finance a new home.
An adjustable-rate mortgage (ARM), for example, can be a more suitable choice for a first-time buyer; and, for a buyer who intends to move or do a home refinance within the next 10 years.
Source: The Mortgage Reports
ARMs offer lower mortgage rates than a fixed-rate loan and, sometimes, the savings is substantial. It’s best to sit down with your mortgage lender to figure out what options are best for you.
Why an ARM?
The Adjustable Rate Loan (or ARM), isn’t something to shy away from – here’s why: the typical homeowner moves every 7 years. If you know you’re going to move, then, why pay extra for a 30-year loan?
According to Freddie Mac, 30-year mortgage rates currently average near 3.50% nationwide for borrowers willing to pay an accompanying 0.6 discount points at closing.
5-year ARMs, meanwhile, average 2.74% with only 0.5 discount points.
The majority of today’s ARMs work like this :
- For the first group of years, your mortgage rate is fixed and unchanged
- After the initial group of years, your mortgage rate adjusts once per year
- After 30 years, your loan is paid-in-full, as with any other 30-year loan
So, the key to an ARM is how it will adjust each year. Thankfully, this process is regulated for loans via Fannie Mae and Freddie Mac (i.e.; conventional loans); and loans via the FHA and the VA.
Regulation protects mortgage borrowers from having to accept huge jumps in a mortgage rate on an annual basis. Mortgage rate changes are severely limited.
For example, with a 5-year ARM, the initial mortgage rate of the loan remains fixed for a period of 5 years. After the 5 years are over, the mortgage rate changes on the loan’s “anniversary” every year for the next twenty-five years.
Buying A First Hom
e? ARMs May Be Best.
According to the National Association of REALTORS® and its 2015 Home Buyer and Seller Generational Trends Report, the typical under-40 home buyer expects to live in their home for a period of 10 years.
The report also notes that “expected tenure is generally longer than actual tenure“, which means that homeowners tend to over-estimate the number of years they’ll spend in a house.
Indeed, the youngest group of buyers, the report says, tend to sell within five years of purchase, which makes them ideal candidates for the 5-year ARM.
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