Should I Stay or Should I Go? Which is the Right Answer for Me?
This is the best explanation of ARMs vs. 30 Year fixed mortgages I've seen, from Gene Mundt,a mortgage banker in Chicago. The problem with ARMs, is everyone got really scared of them when property values went down and refis became difficult. But what the misperception is, is that it doesn't always mean a dramatic increase in payment. If you are buying your first home, say a 1 bedroom condo, look at the savings you will get from an ARM. Worth a serious consideration. If fear of the unknown is scarier to you than fear of not saving an extra $2,000-$4,000, stick with the fixed.
A Musical Introduction:
"Should I Stay or Should I Go"? ... by the CLASH
double-click -
http://www.last.fm/music/The+Clash/_/Should+I+Stay+or+Should+I+Go
Depending on your financial scenario, you may have more than one option to consider for your home financing ... and that's good. Being in this situation is actually an envious one. Before you make this important final decision regarding financing programs and rates, gather all the information and facts you need ... ask questions.
To help you in your decision I have provided two different scenarios to consider below. Read the explanations and do the math in each scenario. Put yourself in the same place as these potential buyers. See which program option might work for you ...
The Scenario:
A young woman. Unmarried. Buying her first home. Planning on staying in the starter home 5 years, or less. She qualifies for both a FHA 30 Year-Fixed Mortgage and a 5/1 ARM (Adjustable-Rate Mortgage).
Here are the numbers:
- FHA 30 YR Fixed-Rate 4.5 % $150,000 = $760.03 P&I
Net Difference: $65.36/month
This young woman, could pay down higher-rate credit cards, save the equivalent of her monthly Insurance Escrow payment, or qualify for an additional $13,000 in buying power if she decides to utilize an ARM loan for her financing.
The Scenario:
Young Man. Now Married. Baby on the way .. wife will be taking a short maternity leave. Job has changed also. I've heard bad things about ARM's. Am I screwed?? And what happens to my payment?
Answer:
No. Not at all. Remember, your interest rate cannot change during the five year term of the loan. And, your ARM loan is not due and payable at the end of the 5 year term ... it simply "adjusts to market conditions at the time".
During that 5-year time with an ARM loan, you have saved $65+/month, or $780+/year, or $3,900/5-year term ... over the costs of the 30-Year FHA Fixed Rate Loan talked about above.
After the initial five year term is up, your worst-case interest rate scenario increase, per year, is typically 2% above your initial rate ... and as of today (8-30-2010), that means your new rate would be 5.75%.
At a 3.75% rate, your payment is $760.03. At 5.75% it rises to $875.36, an increase of $115.33/month. But look at these comparisons for a period of 1 year:
- $115+ X 12 months = $1,380 (Increase amount per month X 1 yr)
- $3,900 - $1,380 = $2,520 (5-yr Savings minus 1 yr @ Increased Rate)
This Scenario's Outcome: You have at least two+ full years of increased interest rate that you are still "in the black" and have been saving money by taking out the ARM loan.
Summation:
Let me stress this point, ARMs are not for everyone, nor can every Mortgage Originator adequately explain the pros and cons of Adjustable Rate Mortgages.
While listening to the details regarding ARMS, keep an open mind. Ask yourself this basic question ... "Where do I think I will be in 5 years"?
If you're not sure, my suggestion is to be cautious. Pass on the ARM loan. "Lock-up" that Fixed-Rate loan. It's still a fantastic rate!
But, if your plan is to move on within five-year's time, either because of a job transfer or changes coming in your life ... don't "overpay" on your mortgage. Save where you can and secure an ARM loan.
For Extra Information Regarding ARM Loans:
Contact me! Direct: 815.277.4036 Cell: 708.921.6331 - or - write me @: gene@chicagobancorp.com
Or go to the Federal Reserve Board site, http://www.federalreserve.gov/pubs/arms/arms_english.htm, and order your "Consumer Handbook on Adjustable-Rate Mortgage" (CHARM) booklet.
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