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Up in ARMS: why many are foregoing the 30-year fixed mortgage

by McIntosh on May 24, 2012

With interest rates remaining near historical lows, it’s no wonder that many buyers are looking to lock in a 30-year fixed rate mortgage for their property.  What’s there not to love, right?  The guarantee of cheap money for the next three decades:  hooray!  However, if you think your likely ownership of the property will last no more than 5-10 years, it may be worth considering a shorter product like a 5 or 7 ARM (Adjustable Rate Mortgage).  Why?  First of all, the rates are even lower.  Unless you’re looking to keep the property for investment purposes after you move out, why pay more in interest for a 30-year term that you won’t use?  Second, an ARM is still amortized over 30 years just at a lower rate, fixed for a shorter term.

Further, if you happen to be among those who still receive chunky year-end bonuses, it behooves you to consider interest-only ARMS.   Not only do you get to pay only the interest portion of the loan (you already pay mostly interest for the first years of a 30-year mortgage anyway) but your payments readjust each time you use that bonus to pay off a portion of the principal.    Most buyers’ cost of ownership could be cut almost in half by opting for an interest-only ARM versus a 30-year fixed product.  On a $1 million mortgage, monthly payments for a 3.5% 7/1 IO ARM would be $2916 versus $5066 for a 4.5% 30-fixed.  While this doesn’t make sense for everyone, it pays to consider all options before landing on one product.

{ 1 comment… read it below or add one }

Howard Lipset May 30, 2012 at 9:43 am

Definitely agree that ARMs can be more advantageous.
Most ARMs are interest only. It is important to make extra principal payments,
I suggest to my clients that we calculate the 30 year fixed payment and then make that payment against an ARM. At today’s rates, the monthly amortization will be almost equal to the interest.
Therefore, you can take huge chunks out of the mortgage.

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