Don’t Be So Quick to Say No to an ARM Loan. Still a Great Option For Many Buyers

With memories of the housing crisis and the negative perception many people have of the words “Adjustable Rate Mortgage,” buyers of Central Florida new homes have been afraid to consider adjustable rate mortgages, with many opting for the predictable 30-year fixed-rate mortgage.

Indeed, when the housing market started its down turn, using an ARM didn’t make much sense since the adjustable rates weren’t much lower than the fixed-rate options. But today, the rate spread between the 30-year fixed-rate mortgage and the 5-year ARM has widened to historic levels, some say.

As rates on 30-year fixed-rate mortgages began increasing in October, “ARMs have not moved nearly as much,” said Leif Thomsen, CEO of Mortgage Master Inc., a mortgage lender based in Walpole, Mass.

Assuming a $160,000 loan amount, a 30-year fixed-rate mortgage at 4.875% means a monthly payment of $846.73. Interest paid after five years: $37,468.

Compare that to a 5/1 hybrid adjustable-rate mortgage at 3.125%. For the first five years, the monthly payment would be $685.40, and you’d pay $23,697 in interest over those five years.

So, for a borrower who plans on moving within five years anyway, they’d save as much as $13,771 by financing with an ARM.

More choose ARMs

While the volume of adjustable-rate mortgages originated has decreased in recent years, the share of ARMs is rising.

ARMs finance 7% of new home-purchase loans today. “We are expecting ARMs to gradually gain back some favor with mortgage borrowers rising to an average 9% share of the home-purchase market in 2011,” states Frank Nothaft, vice president and chief economist of Freddie Mac.

The ARM provides buyers with several advantages over a fixed rate mortgage.   It can work as a savings plan, with purchasers of Florida real estate setting aside the monthly savings between the fixed rate and ARM rate payments. Another advantage is, due to the lower rate, the principal balance is reduced quicker as the loan is amortized. The buyer can generally qualify for more home with the ARM payment, keep the debt to income lower and house payment more affordable and save thousands of dollars on mortgage interest.  Additionally, homeowners can generally convert the ARM to a fixed rate with little costs at the expiration of the initial “fixed” period. For more information about ARMs, visit The Wall Street Journal Market Watch website.