What You Need to Know About ARM vs. Fixed Mortgages
Let’s face it, mortgages can be confusing. Deciding what type of mortgage is right for you can leave you with your head spinning. In order to help you navigate the mortgage/lending world, check out our breakdown of ARM vs. Fixed rate mortgages.
Adjustable Rate vs. Fixed Rate
With mortgage rates beginning to rise in 2018, lenders have already begun to advise borrowers to finance with an adjustable rate loan instead of a 30 year fixed rate loan. Here are two thoughts a borrower should consider before accepting that advice
1) Adjustable rate mortgages (ARM) are not for everyone
2) There’s a good time and a bad time to choose an ARM
ARMs and the Last Housing Cycle
During 2004 in Southern California 80% of all new mortgages were adjustable rate loans. 47% of them were interest only loans. In 2007 when the housing market collapsed home values fell and homeowners did not have the equity to refinance their soon-to-adjust mortgages. They felt trapped because their interest rate would increase and the interest only option would start amortizing making their loan unaffordable.
Fortunately, the Federal Reserve lowered interest rates to almost zero and the indices the ARMs were tied to fell as well allowing their payments to adjust downward. Home values have increased since the market downturn and most borrowers have refinanced out of their adjustable rate loans. Today, 70% of all mortgages are a 30 year fixed rate.
History Doesn’t Always Repeat Itself
Currently, the economy is doing well, unemployment is low and the Federal Reserve is anticipated to raise the interest rates. Any borrowers that opt for an ARM this time may not have the benefit of the Federal Reserve lowering interest rates to save them. The most common reason given for taking an ARM is because the borrower doesn’t plan on living in the home that long. A few years of lower payments is not worth the risk of higher payments later if plans change or the housing market changes. The best time to choose an ARM is when interest rates are anticipated to go down, not up.
If you’re consider refinancing or searching for financing for a new home, contact Cesi Pagano & Associates and we will be happy to put you in touch with a great mortgage professional.