Summary List Placement
When you get a mortgage, you choose between two basic types of loans: a fixed-rate mortgage or an adjustable-rate mortgage.
Fixed-rate mortgages lock in the interest rate for the entire life of your loan. Adjustable-rate mortgages keep your rate the same for the first few years, then adjust it periodically.
For example, a 30-year fixed-rate mortgage would lock in a rate for the entire 30 years. With a 5/1 ARM, you’d pay the same rate for the first five years. Then the rate would change once per year for the remaining 25 years.
Usually, the introductory rate for an ARM is lower than fixed interest rates. But that trend has been shifting in recent weeks. Fixed rates have been steadily decreasing, but adjustable rates have been going up. This means ARMs are less beneficial than they used to be.
ARMs used to charge lower rates than fixed-rate mortgages
Typically, there are pros and cons to both fixed rates and adjustable rates.
Fixed rates have been the better option when you’re buying your forever home, because fixed-rate mortgages are the more stable type of loan. Regardless of whether rates go up or down, you know you’ll pay the same rate for the entire term.
ARMs have been better if you plan to move out of the home before the introductory period ends. This way, you’d pay a lower rate for those few years than you would with a fixed rate, without risking paying a higher rate once the intro period ends.
Now adjustable rates are increasing, and fixed rates are decreasing
Recently, fixed rates have been steadily decreasing and are at all-time lows. But adjustable rates have been gradually increasing. Now a 5/1 ARM rate could be higher than what you’d pay for a 30-year fixed rate, which hasn’t been the case in a long time.
“Investors really don’t want a 5/1 ARM on their books,” Darrin English, Senior Community Development Loan Officer at Quontic Bank, told Business Insider about why the trends are shifting.
That’s because rates are at historic lows right now, so there’s a decent chance your ARM rate will go up when your introductory period ends. Then you might refinance into a different mortgage with a lower rate, and your original lender risks losing your business after only a few years.
You’re probably less likely to refinance your 30-year fixed-rate mortgage in five years, because it would probably result in a higher rate than what you have now.
English explained that the industry is increasing adjustable rates to discourage homebuyers from getting ARMs. If you get a fixed-rate mortgage instead, then the lender benefits from the increased likelihood of keeping your business until you’ve paid off the loan completely.
It’s probably not a good idea to get an ARM right now
So, should you get an ARM? Probably not.
“Normally there’s an advantage to a 5/1 ARM,” English said. “There’s a reward, like a lower rate.”
But now that adjustable rates are increasing while …read more
Source:: Business Insider