So who should take an Adjustable Rate Mortgage? An adjustable-rate mortgage is perfect for someone who is only looking for a short term investment. If the home will be sold in less than five – seven years, it is not likely that the interest rates will not adjust to many times, especially if it is locked in for a few years to start.
It is often very advantageous in a market that is expected to fall as the interest rate will reset lower as the market drops. This can result in paying a lot less interest than a 30 year fixed and not having to refinance to lower your rate. It can also work opposite in a rising market, adjusting upward as the interest rate market rises.
Another reason one might entertain an arm might be you are not expecting to be in the property much longer. Our advice is still to secure a year or two longer than you expect. This might save you some free money. ARM STRATEGY is often used by government workers who now when they are retiring and the now when they are moving. For the purpose of illustration – client has a $400,000 loan with a 30 year fixed at 4.5% and they know they are retiring on 4 years and moving south. They could do a no closing cost refinance at 3.25% saving 1.75% on $400,000 over the next 4 years this would save them over $28,000 in a 4 year period.
Qualify for more house- would be another reason to choose an arm. If the current interest rate was 4.00% and a client qualified for a $400,000 loan amount. A client on a 5/1 arm @ 3.00% would qualify for a $452,800 loan amount.
The refinance of an arm can be done with no closing cost refinance. If you have an arm that is about to adjust, many will refinance to another arm to secure another fixed period of time for free or at reduced cost. This buys more time and fixes the loan for a period of time. in the past clients with larger homes would do a 1 year adjustable no closing cost refinance/zero closing cost refinance every time the loan would adjust. This keep them at the initial rate or the teaser rate. vs adjusting upward 2%. It is more common now to refinance with a 3/1 or a 5/1 arm with no closing cost securing slightly more time. If you would like more details on No Closing Cost Arm refinances call first meridian mortgage at 703-799-5626.
If you have an arm that is subject to yearly adjustments, you might be safer to refinance to a new 5/1 arm to fix the rate for 5 years at the same level. Remember if you had an arm that adjusted down and are waiting for rates to move up before refinancing you should consider this.
- You should lock in a 3/1/ or 5/1 sooner than later. The advantage to this is you will have a lower life time cap. And secure a longer period before the next adjustment.
- Example: 5/1 arm started 8 years ago at 5% with 2/2/5 caps. With rates being lower the arm adjusted down in the 6th year to 3% and has then adjust up or down an .125%. The client should lock in at no cost a new 3/1 or 5/1 In the range of 3.25%. By doing this they will have a lower life time cap of 8.25 vs the 10.00% on his current.
- Second by securing a longer period of time you will be able to plan for adjustments a bit more certainty. If you are on a yearly adjustment you can go up 4% in a period of 13 months. I would rather play the game in 3 and 5 year segments of time.
Rates are going to increase at some point.