from Scripps Howard News Service
Most people who have an adjustable mortgage (ARM) eventually refinance into a fixed rate. It brings peace of mind and makes financial planning much easier.
But ARMs still have their place, says a real estate columnist for Scripps Howard News Service.
An ARM, which has an initial low rate that usually rises over time, can be useful to first-time home buyers who cannot otherwise qualify for the money they want. And adjustables are sometimes used by so-called "serial refinancers" who go from ARM to ARM, keeping a low rate all the time.
If you're relatively new to the real estate market you may not realize how many more adjustable rate products are available than could be commonly found just a few years ago.
You can now find 30-year mortgages that are stable for three years, five years, seven years or 10 years and then began adjusting every year until the loan is paid off. These loans go by the names 3-1, 5-1, 7-1 and 10-1.
Five years ago you could find the 3-1 at about a third of lenders but had to search hard for longer adjustables.
Now, a survey by the big secondary mortgage firm Freddie Mac finds that 76 percent of lenders offer the 5-1 ARM, 63 percent offer the 7-1 and 56 percent the 10-1.
Freddie Mac said its survey also found that "ARM borrowers would do well to comparison shop among several lenders. The study found a considerable range of prices offered on the same type of one-year ARM plan. The initial rates quoted varied by more than three times that reported for fixed rates."
You have to decide if the initial savings on an ARM makes the higher risk worthwhile.
Freddie Mac said a homeowner who opted for a 3-1 ARM last November when the initial rate was 6.19 percent will save $1,700 over three years compared with a homeowner who got a fixed rate mortgage at 6.89 percent.
Of course, the ARM holder might lose all those savings in later years when the rate on his mortgage rises or he has to refinance. That's what makes ARMs more dicey.
