Most consumers have heard frightening scenarios about people stuck in adjustable rate mortgages watching their interest rates climb to never ending heights. After listening to enough of these stories it’s no wonder the majority of American home buyers and homeowners flock to the security of fixed rate financing. Is this the wisest decision? Back in the subprime era there were adjustable rate products which did not have an upside. Meaning, that once the introductory rate period came to an end, one’s rate went up regardless of the current rate of the index which the loan was tied to.
Now that most, if not all, “subprime” loans are long gone, the majority of people looking at ARM products are going to be investigating Freddie Mac or Fannie Mae products. With these loans each program has an introductory interest rate which is in place for a specific number of years. In the case of a 5/1 ARM the introductory rate ends at the close of the 60th month. With a 7/1 ARM, it’s the 84th month. Once the introductory rate expires, the loan then adjusts according to the loan’s margin and the current rate of the index which the loan is associated with (i.e. the MTA Index or a specific LIBOR index). There are also adjustment caps which limit annual movements and the overall rate which a loan can increase or decrease to. You may have noticed from my last sentence that unlike many “subprime” ARM programs, most Fannie Mae and Freddie Mac adjustable rate loans do have the potential to go down. Let’s take a look at an example scenario. A consumer took out a 7 year LIBOR indexed ARM seven years ago with an introductory note rate of 5.50% and a margin of 2.250%. Fast forward eighty-four months and the LIBOR rate had fallen to 0.75%. When you add the index rate to the margin, the new rate, after the first adjustment would be 3.00%. So, not only would that consumer have likely saved money during their introductory period when compared with a 30 year fixed rate mortgage but they would now have an even lower rate than is available with current 30 year fixed rate pricing. Sound too good to be true? It’s not. On the day this article was written, the 1 year LIBOR index rate was 0.73% (down from 1.16% from the previous year).
So why don’t more people consider a 7 year ARM or 5 year ARM? There are multiple reasons adjustable rate mortgages are not a good fit for everyone. First, if a person is not confident that real estate values in their area will appreciate or remain flat, they may want to avoid an ARM (especially if they do not have a significant equity position). Many buyers in states such as California took advantage of option ARMs and other adjustable rate products only to find their properties values plummet below the amount that they owned on their homes thus making it impossible to refinance out of their mortgages. The same problem can result from lack of job security. If someone loses their job they may not be able to refinance out of an ARM until their employment history meets the lenders’ guidelines. When weighing the pros and cons of 7 year ARM financing, be sure to speak with a licensed mortgage professional to get the facts, and examine your personal tolerance for risk. While adjustable rate mortgages may not make sense for everyone, the same can certainly be said for long term fixed rate mortgages. Choose wisely.
Article Directory : http://www.articlecube.com
