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ARMs are back.
Adjustable rate mortgages, known for their home-buying clout,
short-term cost savings and array of types, are enjoying a renewed
popularity thanks to rising interest rates and more expensive homes,
according to Freddie Mac's 16th Annual ARM Survey.
A year ago ARMs comprised only 8 percent of the conventional
home-buying mortgage market. Today the share is 30 percent said
Freddie
Mac.
That's because, while the 30-year fixed-rate mortgage (FRM) was up
Dec.
16 to 7.86 percent from 6.69 percent a year ago, ARMs rose less, from
5.55 percent to 6.45 percent during the same period, Fannie Mae
reported.
With an ARMs' lower initial rate you can qualify for a larger loan
and
a home you perhaps couldn't afford or qualify for with a FRM. You'll
also pay less, at first, for an ARM compared to a FRM on the same
mortgage.
In November, the difference between 1-year ARM rates and FRM rates
was
1.3 percentage points for a $100,000 mortgage. That amounts to an
initial year ARM savings of $1,080 on the $100,000 ARM loan, compared
to
the same FRM loan. The savings is larger, $1,618, over the first three
years of a 3/1 ARM and $1,846 over the first five years of a 5/1 ARM,
Freddie Mac said.
ARMs can be as many as 2 percentage points cheaper than a FRM,
depending upon the economy, and if an ARM's index rates falls, so does
your monthly mortgage.
ARMs are also a good choice even when the rate is on the rise, if you
know your income will rise to keep pace with the loan rate's periodic
adjustments. An ARM could also be a good choice, if you plan to move
in
a few years, say before the ARM reaches it's ceiling or, if it has a
longer low-rate front end, before it adjusts for the first time.
Faced with the rising costs of housing, more and more consumers are
opting for ARMs with longer initial rates, particularly the 5/1 ARM,
which Freddie Mac says is the industry's second most popular ARM
behind
the 1-year ARM.
"On average, owners tend to relocate within 6 years of purchasing a
house, so ... longer ARMs could well serve for as long as you remain
in
your home. Look for an ARM offering an interest rate at least one-half
percentage point below what lenders ask for a conventional 30-year
fixed-rate mortgage," reported Consumer Reports in it's September,
1999
article, "Home runs: Strategies for today's hot housing market".
Wayne, PA-based Jack Guttentag, "The Mortgage Professor,"
offers
the Comparing
an Adjustable-Rate With a Fixed-Rate Mortgage Calculator to let
you
compare ARMs with FRMs and calculate your savings.
The Federal Reserve's "Consumer
Handbook on Adjustable Rate Mortgages" poses questions you should
consider about ARMs.
Is my income likely to rise enough to cover higher
mortgage payments if interest rates go up?
Will I be taking on other sizable debts, such as a
loan
for a car or school tuition, in the near future? If your adjustable
rises beyond your reach you could be in financial trouble.
How long do I plan to own this home? If you plan to
sell soon, rising interest rates may not pose the problem they do if
you
plan to own the house for a long time.
Can my payments increase even if interest rates
generally do not increase? Read the small print. Some ARMs are
designed
to rise even if FRM rates do not.
"Another part of the savings comes through introductory "teaser-rate"
pricing. Lenders discount the initial interest rate to attract home
buyers," said Michael Schoenbeck, senior financial analyst at Freddie
Mac.
In November the initial rate for a 1-year conforming ARM was about
two
percentage points below the equivalent fully-indexed rate.
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