Purchasing
- Your first home
- Your next home and move
- An investment property
- A vacation home
Refinancing
- To tap your home equity
- To save money
- To avoid rate increases
- To lower monthly payments
Home Equity
- Loans and lines of credit
- Finance major expenses
- Consolidate Debt
- Invest
Fixed-rate better than an ARM
The interest rate environment has been quite volatile in recent months. The Federal Reserve finally stopped raising interest rates after 17 consecutive hikes (for the time being).
When looking at mortgages in relation to interest rates, they obviously go hand in hand. The rising interest rates have caused more people to become weary about taking out an adjustable rate mortgage or ARMs.
ARMs are one of two of the most popular types of mortgages, the other being a fixed-rate mortgage. ARMs are becoming less popular because the amount of your monthly mortgage payment depends solely on the current interest rates. If you got your ARM when rates were low, you probably had a fairly low monthly payment. But now that rates have consistently been heading upwards, you could be facing monthly payments that are hundreds of dollars more than what you are used to.
A November 20, 2005 article by Margaret Price of nydailynews.com, “Fixed-rate is the way to go,” discusses the downfalls of ARMs and why it may be better to go with a fixed-rate mortgage.
“‘Adjustable rates can go down in favor of the homeowner. But if they go up, a person on a fixed income could get into financial trouble trying to make higher payments,’ she said. And more people are now sharing such views. After the heyday of low mortgage rates, which bottomed in the summer of 2003, the tide gradually began to change as the Fed raised interest rates 12 times since last summer. Over time, short-term rates began to creep up closer to longer-term rates, which haven't risen as sharply. That made adjustable-rate mortgages (ARMs) riskier. And by mid-year, the appeal of ARMs had noticeably fallen from its peak popularity in March, according to data from the Mortgage Bankers Association (MBA).”
The rates between a fixed-rate and an ARM are actually quite close. So now, people are less likely to take the chance on an ARM since there is not much of a difference, and it wouldn’t be worth the risk
“According to the MBA, for the week ended Nov. 11, contract interest rates on 30-year, fixed-rate mortgages averaged 6.33%, versus 5.46% for one-year ARMs — producing a percentage difference of 0.87. By comparison, that rate gap was a noticeably wider at 1.6 percentage points in this year's first quarter, when ARMs were their most popular. In terms of monthly payments, the cost for a $400,000, 30-year, fixed-rate mortgage stands at $2,484. That's just 9% higher than the $2,261 in monthly payments for an adjustable rate mortgage. The gap narrowed from just a year ago, when adjustable-rate mortgages were 19% more expensive than their 30-year, fixed-rate cousin.”
Many industry insiders suggest getting a hybrid ARM mortgage which is a combination between fixed-rate and ARM.
“Hybrid ARMs are mortgages that have rates that are fixed for three, five, seven or 10 years before becoming adjustable. Ideally, borrowers would select the ARM hybrid that corresponds to the time they plan to hold a property. "Most borrowers move within a 10-year period," McBride said. If they take a hybrid ARM, they'll get an "initial rate that is always lower than on a 30-year, fixed-rate mortgage. And if their timetable (for unloading the property) pans out, they won't face the prospect of a change in rates" once the fixed-rate portion expires. But beyond the fixed-rate period, rates in hybrid ARMs can change annually — which has become more worrisome lately. Those who obtained shorter-term hybrid ARMs earlier in the decade — when rates were extremely low — will see the fixed-portion of their mortgage expire in the foreseeable future, if it hasn't already.”