Thursday, January 16, 2014

Adjustable Rate Mortgage are BACK!!

Adjustable Rate

Fascinating!!!  Absolutely Fascinating!!

Over the weekend in the Virginia Pilot, I noted a Navy Federal ad boasting of a 3.05% interest on a 5/5 adjustable interest rate mortgage.  Today, I see a RisMedia's blogpost, self titled as Leader in Real Estate Information, along with a couple other touting the comeback of the adjustable mortgage due to the rising interest rates.

With interest rates within a 1 point or so of absolute historical lows, the home buyer must carefully evaluate the adjustable rate mortgage option.  To take an adjustable rate mortgage just for a lower payment without looking at the bigger picture or evaluating the entire situation can be a huge mistake.

No doubt if you are buying in 2014 and will be moving or expect to move in three years, you are a good candidate to buy a home with an adjustable rate mortgage.  With the low introductory rate, even a rapid run up in rates(not expected), your rate would at the highest point(based on Navy Federal's start rate) would be 5.05% when you sold the home even if rates went to 5.75%.  

Saving money on one's mortgage is always very attractive.  In the example above, the home buyer/owner would absolutely spend fewer dollars than if he/she locked in a 30 year mortgage in current mid to high 4% range.

Yet, if a home buyer unsure if he/she will sell in 5 or 10 years decides on a adjustable mortgage, he/she could find themselves in a much less positive situation.   In five years, it is very hard to predict the interest climate that far out.  It even gets worse for 8 years or 10 years out.

With interest rates low(artficially low) for all of 2011-2013, it is very possible that rates could rise over the next few years.   Perhaps they rise and settle at the historical average of mid 7% interest rates.

The homebuyer unsure of a move date would see increasing interest rates and house payments each year.  Then when the 5 year period is up(Navy Federal's example), the homebuyer, now home owner, would have to refinance to a 7% interest rate for the next 5 years(if moving in 10) or next 25 years possibly.

This minimum 2.5% premium in interest for 5 to 25 years would caused the homeowner to spend substancially more for housing than he/she would have if she would have locked in a 30 year 4.5% mortgage at the time of purchase.

As your situation can be different both at the price point of home you seek to purchase and the interest rate, based on your credit score, precise examples were not presented.  

Yet, it should be abundantly clear that a home buyer must carefully evaluate the advantages and disadvantages of an adjustable mortgage.

Your Realtor can help you and point you to an expert Mortgage Officer for a detailed discussion.

Consult your Realtor today!!
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