If you bought a home in Bethesda, Rosemary Hills, or Chevy Chase back during the financial crisis, you may have financed with an adjustable-rate mortgage or ARM. In subsequent years, these loans fell out of favor with most buyers for their higher risk and higher default rate. But, says an article on the New York Times web site, these loans have been “revamped” and are making a comeback, having removed things like “teaser” rates and “option” features where borrowers start off paying less and then pay more as the loan continues.
Unlike a fixed-rate loan with its unchanging interest rate, an ARM starts out at one rate but adjusts, usually once a year, at a capped rate based on its interest-rate index. Typically the adjustment is 2 percent up or down, and the total increase amount is capped generally at around 6 percent above the initial interest rate.
ARMs most in demand right now are the “5/1” and “7/1” where rates are fixed for either the first five or seven years and then adjusted each year after at a capped rate. For homeowners who want to sell or refinance after five or seven years, the adjustable-rate mortgage can save a lot of cash, as starting interest rates are generally one to one and one-half percent lower than the 30-year fixed loan rates.
For example, a 5/1 ARM for a $500,000 loan at 3.5 percent saves $42,507 in the first five years before adjustment compared to a 30-year fixed-rate loan at 5.25 percent. The 7/1 ARM saves $38,330 in its first seven years.
Although there are now more lenders offering ARMS, getting them still might be difficult. Fannie Mae has decreed that borrowers must qualify on either the starting rate plus two points or on the full index rate tied to the loan, whichever is higher. Just as with conventional loans, good credit will help in qualifying for an ARM.
When deciding about an adjustable-rate mortgage, think both short-term and long-term. If you’ll likely be selling or refinancing after five to seven years, an ARM could make the most sense. If you’re in your home for the long term, take a good look at the increase structure and cap amounts so you don’t end up paying more than you can afford. It’s all in how the numbers meet your needs.
Contact me, Mynor Herrera, today for expert help buying or selling in the DC, MD, & VA areas! I also specialize in Bethesda and Chevy Chase, as well as the sub-divisions of Rosemary Hills, Rock Creek Forest, East Bethesda & Whitehall Condominium.
No comments:
Post a Comment