When an adjustable-rate mortgage makes sense:
When the housing market began declining, many people claimed that adjustable-rate mortgages (ARMs) were the cause. However, recently they’ve been making a comeback, especially among affluent borrowers.
Making sense of the story
- An ARM offers an introductory period in which
the borrower pays 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 these borrowers are paying a premium for that
security. The spread between rates on 30-year fixed-rate mortgages
and the most-popular ARMs now stand 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.
- Borrowers can determine if
an ARM is the right loan option for them by looking at their financial
situation and the terms of the ARM. ARMs carry risks in periods of rising
interest rates, but can be cheaper over a longer term if interest rates
decline. An ARM may be a good option to consider for borrowers who plan to
own the home for only a few years, expect an increase in future earnings,
or the prevailing interest rate for a fixed-rate mortgage is too high.
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