Do Adjustable Mortgage Rates (ARMs) Make Sense?
Today I pulled up a Purchase Rates Assumption from Chase Mortgage just out of curiosity to see what the rates are like today.
So this is what I find:
30-yr fixed: 3.875%
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15-yr fixed: 3.125%
7/1 LIBOR ARM: 2.875%
Agency 5/1 LIBOR ARM: 2.500%
Okay, I usually don’t deal with mortgages and I don’t have the best idea of what exactly entails a 7/1 LIBOR ARM or an Agency 5/1 LIBOR ARM. But I do notice there’s a big discrepancy on the interest rates between a 30-yr fixed and an Agency 5/1 LIBOR ARM. Over the course of interest payments, it can potentially make a huge difference.
But Which is Better?
First, I’d like to say between 30-yr fixed and 15-yr fixed, I am a big fan of the 30-yr fixed, especially in today’s environment. I like 30-yr fixed rates because right now real estate debt will not get any cheaper. I will elaborate on this concept in a future post why 30-yr fixed is better than 15-yr fixed.
So now let’s compare 30-yr fixed to 7/1 LIBOR ARM and 5/1 LIBOR ARM.
So ARM, or adjusted mortgage rates, goes like this. The first part of the number shows you how many years the current interest rate is fixed for. With aspect to LIBOR, the future adjusted rates would be a certain percentage over what the LIBOR rates are. LIBOR is the London Interbank Offered Rate. It is a rate that banks in London use to lend to each other. Unfortunately, as we’ve learned in recent news, it often gets fixed by banks amongst themselves.
Since we don’t know what the market is going to be like in five to seven years, can we be certain that interest rates won’t rise dramatically?
It is hard to say. Typically there are caps to ARMs that limit how high the rates would go. However, you certainly don’t want to see your rate go from 2.5% in one year and 7% the next. The changes in interest rate can dramatically change your monthly payments.
But what if your investment plan is to own the piece of real estate for only three years? Now would that make sense?
Yes. It is still, however, a speculative bet. The market constantly changes so you never know whether it will be a good time to sell before your LIBOR changes.
On the other hand, you can protect yourself by refinancing again. The rates may be lower depending on the market environment, but it is safe to say that it won’t be as low as 2.5%.
Are you ready to take that risk? Or would you rather pay 1.375% extra for the peace of mind that your interest rate will never, ever change?
Photo: Chris Butterworth