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.
Are you a first time home buyer?
Let us know if you’ve done this before - whether you’re a seasoned pro or buying for the first time. We’ll share the perfect information with you as you need it.
Home buyers snatched up properties for sale in May as housing made its v-shaped recovery.