Monday, September 10, 2012

You know the economy is recovering when people start writing about Adjustable Rate mortgages

Well, it seems that it's time for the Adjustable Rate Mortgage conversation again ... Some people forget that while lax approval guidelines and bad lending practices were at the core of the financing debacle our economy went through, once the apple was cut open, there also lay the Adjustable Rate Mortgage "ARM". While it is not an evil financing vehicle by any means, it can tempt many away from the 'sleep good' insurance of a fixed interest rate. It definitely can be a great tool for purchases or refinances whose owners will not be in the property for a lengthy period, i.e. those who might downsize when kids go off to college or anticipate an employment tranfer or even those anticipating paying off their mortgage debt in the near future. Regardless of the reason, in my opinion, if anyone discuses ARM's with you ... you should be thinking short term solely and if you do choose one you should at least double your time estimate to give yourself a cushion if your plans change. Thinking one year take the 3 year ARM. Thinking 2 years ... go for the 5 year.Read on for one person's opinion about big savings and then think about that 'sleep good' insurance When an adjustable-rate mortgage makes sense from August 30, 2012: 5:00 AM ET Locking in a historically low fixed rate might feel safer. But borrowers can save big on ARMs right now. By Janice Revell, contributor FORTUNE -- During the housing meltdown, adjustable-rate mortgages were vilified as a hallmark of irresponsible borrowing. Recently, though, they've been making a comeback, especially among affluent borrowers. This summer, for instance, Facebook (FB) CEO Mark Zuckerberg reportedly financed his home using an ARM with a rate of just 1.05%. Most borrowers can't snag a rate remotely close to that. But many would still do well to consider an ARM right now -- even if conventional wisdom says otherwise. An adjustable-rate mortgage offers an introductory period in which you pay a lower interest rate than with a fixed loan; after that, the rate can fluctuate up or down. With rates near historic lows, the safety of locking in a fixed rate appeals to many borrowers. But they're paying a premium for that security: The spread between rates on 30-year fixed-rate mortgages and the most popular ARMs now stands at about one percentage point, more than double the difference just five years ago. That means that homeowners who are planning to either move or pay off their mortgage over the next few years can save big with an ARM. Take, for example, a homebuyer who plans to pay down an $800,000 mortgage. Currently the rate on the fixed portion of a 5/1 ARM -- which is guaranteed for the first five years and adjustable once a year thereafter -- is around 3%. In a typical 5/1 ARM, the maximum increase during the sixth year is five percentage points above the initial rate. Alternatively, our hypothetical borrower could opt for a 30-year mortgage that locks in an annual rate of about 4%. MORE: Mortgage applications up, mortgages not so much Fortune asked Greg McBride, an analyst with mortgage tracker Bankrate.com, to run the numbers on both options. To be conservative, McBride assumed the worst-case scenario with the ARM -- one in which the rate shoots up to the 8% maximum in year six. Here's what would happen: For the first five years, our homebuyer's monthly payments on the ARM would be $3,373 -- or $446 less than what he'd pay under the 30-year fixed mortgage. Over that period he'd save a total of $39,000 in interest and would amass $12,000 more in equity. After the initial five years the monthly payments under the ARM would balloon to $5,490. But it's not until the seventh year of the loan that the savings garnered by the lower ARM payments during the first five years would be wiped out entirely. (This doesn't factor in the mortgage-interest tax deduction, which would be greater on the fixed-rate loan for the first few years but higher on the ARM thereafter.) If after five years, however, the rate on the ARM increased at a more moderate pace of one percentage point a year, the initial savings wouldn't be eclipsed by the fixed rate until the 10th year of the loan. The bottom line: Unless you definitely plan to stay in your mortgage over the long term, it might pay to adjust your thinking. * * * As always ... Keep the faith and when making decisions like these, don't just talk to your Lender and Realtor, choose to consult your CPA or Estate Planner for major decisions like these.

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