For every home buyer today, there’s a perfect house somewhere — and, a perfect loan to match.
Last month, for example, 5.3 percent of home buyers chose an adjustable-rate mortgage (ARM) to help finance their house, which is a -19.7 point change from the year earlier.
The data reminds us how buyers can choose whatever mortgage fits their life best and, sometimes, that best fit is an ARM — especially when you’re not buying your “forever home.”
Adjustable-rate mortgages work like this:
- A starting interest rate is assigned; it’s guaranteed for x years
- Beginning after x years, the rate changes annually
- After 30 years, the loan balance has reached zero and is paid-off
Some home buyers gravitate to ARMs because ARM interest rates are often lower than rates for comparable fixed-rate loans. For example, today, the interest rate difference between an ARM with a 5-year starting interest rate and a 30-year fixed-rate mortgage is about 0.27 percentage points.
On a loan size of $250,000, that can create significant monthly savings.
Home buyers also know that ARM changes aren’t random; lenders don’t get to pick new rates from thin air.
When adjustable-rate mortgages adjust, the adjustment is based on a formula that’s loosely based on the health of the U.S. economy. So, if your ARM interest rate happens to adjust higher, it’s highly likely that you’ve been earning a higher rate of return in your savings and investment accounts lately.
Just remember that ARMs aren’t tools to boost home affordability, or to over-extend your household budget. They’re options to help you do more with what you already have.
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Today’s home buyers have 8 percent more purchasing power, and they’re asking mortgage lenders to approve more mortgage applications.