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Started By
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Why hybrid adjustable rate mortgages (ARMs) are good for short-term homeowners.
Posted on 11/14/13 at 11:49 pm
Posted on 11/14/13 at 11:49 pm
Let's say you just bought a house for $192,000. You are planning to stay less than 7 or 8 years. You decide to take out an adjustable-rate mortgage.
You pay 2.75% rate for 5 years, followed by a maximum of 1% annual increases and maximum overall cap of 5% (so never more than 7.75%).
At year seven, had you gone with the fixed-rate at 4.35%, you would have a balance of $166,630.
With the 5/1 ARM, assuming a maximum 1% rate increase in years six and seven, the balance on the loan will be $158,128, an extra $8,502 in equity.
In addition, the monthly P&I payments on the ARM would be $784 for years 1-5, $874 in year 6, and $965 in year 7. This is in contrast to paying $956.30 per month over the same time period for the fixed-rate mortgage.
You could actually stay in the home for up to 11 years and 2 months until you would be paying more in interest on the ARM than you would have on the FRM.
I think this is a clear example of why short-term homeowners should stongly consider an adjustable-rate mortgage, provided they can find one with limited adjustments (1%) and a maximum overall rate no more than 5% from base.
You pay 2.75% rate for 5 years, followed by a maximum of 1% annual increases and maximum overall cap of 5% (so never more than 7.75%).
At year seven, had you gone with the fixed-rate at 4.35%, you would have a balance of $166,630.
With the 5/1 ARM, assuming a maximum 1% rate increase in years six and seven, the balance on the loan will be $158,128, an extra $8,502 in equity.
In addition, the monthly P&I payments on the ARM would be $784 for years 1-5, $874 in year 6, and $965 in year 7. This is in contrast to paying $956.30 per month over the same time period for the fixed-rate mortgage.
You could actually stay in the home for up to 11 years and 2 months until you would be paying more in interest on the ARM than you would have on the FRM.
I think this is a clear example of why short-term homeowners should stongly consider an adjustable-rate mortgage, provided they can find one with limited adjustments (1%) and a maximum overall rate no more than 5% from base.
4
Posted on 11/15/13 at 2:04 am to X
Are teaser rates typically fixed for 5 years? I'd imagine after year 1 the rate would start increasing back to whatever the rate is pegged to at a max of 1%
Posted on 11/15/13 at 2:10 am to yellowhammer2098
It depends on the terms of the agreement. A typical 5/1 Hybrid ARM won't adjust for 5 years and thereafter would be limited to a 1% annual increase until it gets to a cap of 5% more than the initial rate.
Posted on 11/15/13 at 2:15 am to X
Yeah definitely missed the 5/1 part. Seems like most banks would prefer 3/1 right now knowing rates are headed upward.
Posted on 11/15/13 at 7:27 am to yellowhammer2098
Banks don't care one bit.
They can lay off interest rate risk on the back end. They are just there to make the spread.
They can lay off interest rate risk on the back end. They are just there to make the spread.
Posted on 11/15/13 at 7:43 am to X
I strongly considered one when I refinanced my house. Plan to be here for 5-7 years, and I think the maximum increase was less than 5%, which made my maximum rate under 7%. I had a little fear I may be here longer, and the fees/credits I was given for the conventional made up some of the difference.
Kinda regret not doing it now.
Kinda regret not doing it now.
Posted on 11/15/13 at 8:52 am to LSUtigerME
We did this with the first house we bought. We went one step further though and paid the same amount every month as if we had gone with a 30 yr. You get way more equity at the end of the 5 year period if you do this.
Posted on 11/15/13 at 10:23 am to Maderan
That's a smart move.
Posted on 11/15/13 at 10:43 am to LSUtigerME
quote:
Kinda regret not doing it now.
I'm considering it...we're going to be in this house for about 4-5 more years maximum and for some reason if it ends up being longer...it wouldn't be anymore than 7 so the rate wouldn't really be any different than I'm at now.
Posted on 11/15/13 at 11:35 am to LSUtigerME
quote:
Kinda regret not doing it now.
I waffled on it, but it's a pretty big bet (relatively) to place on short term real estate prices. Risk aversion won out for me.
Posted on 11/15/13 at 11:45 am to X
that is not much equity to take on the risk of windstorms and equipment breakdowns.
I think this is a BAD option. This person should rent.
I think this is a BAD option. This person should rent.
Posted on 11/15/13 at 12:33 pm to X
I got in to a 7/1 ARM a couple of years ago for 2.875%. I think the conventional rate at the time was 3.25%- our 5 year plan is to be in a new house, but I went with a 7 year ARM to give a little cushion. I think ours can adjust 2% per year, but it has a 5% cap, so I felt pretty comfortable getting in to it. Our note is about $50/month cheaper, with half of that going to principal, and we're paying $300 extra per month to build equity for the down payment on our "forever" home. The 5/1 ARM was at 2.5%, but I liked the 7 year term better.
Posted on 11/15/13 at 1:55 pm to LSUGUMBO
Mine adjusts monthly 1.625+monthly libor. It's great.
Posted on 11/17/13 at 10:58 am to C
On typical ARM loans, is the monthly principal amount based on 30 yrs?
This post was edited on 11/17/13 at 11:00 am
Posted on 11/18/13 at 6:57 am to Skin
quote:
On typical ARM loans, is the monthly principal amount based on 30 yrs?
Yes, although I think other amortizations are available - and, of course, you can always make additional monthly principal payments to keep you on pace for your schedule - assuming you have no prepayment penalty in the contract.
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