I am seeing an uptick in the use of Adjustable Rate and Hybrid Mortages and for good reason.
Too many people used Adjustable Rate Mortgages in the past to leverage their purchasing power to buy more home than they could afford hoping their financial and property values would improve faster than the potential of the raising rate of their mortgage. Unfortunately, many of them since learned that hope is not an effective strategy.
But, for the right consumer Adjustable Rate Mortgages can still make perfect sense. Americans are mobile and move to follow their job opportunities, their children, their parents or their dreams. If you know that with your lifestyle, you are apt to move in 5, 7, 10 or 15 years, there is an Adjustable Rate Mortgage product that might fit perfectly for you at a much lower rate than a 30 year fixed rate mortgage, so why pay the higher rate for nothing?
For example, assume you are going to buy a home while going to college. Instead of planning on 4 years, factor in a one year buffer in case you end up on the 5 year plan. If you are going to have a $250,00 mortgage, check out the difference:
|Loan type||Mortgage||Interest Rate*||Principle & Interest|
|30 Year Fixed||$250,000||3.65%||$1,143.65|
|5 Year Adjustable||$250,000||2.84%||$1,032.56|
This shows a $111.09 difference per month! That is an annual savings of $1,333.08 and a $6,665.40 savings over the five year period. (* Interest rates from Freddie Mac at the time I wrote this blog).
So if you think there is a high probability of you selling that home in 5 years or less, this strategy still still makes sense even with historic low interest rates that proably will go up (because you are locked in for 5 years). This can also make sense if you plan to make large reductions to your principle balance if you sell other assets, get bonuses, etc. since with an adjustable mortgage, you can typically recast the mortgage resulting in even lower payments instead of just resulting in shortening the term of a fixed rate mortgage.
Adjustable Rate Mortgages and Hybrid Mortgages are not for everyone, but for people that understand the time value of money and feel comfortable knowing their near term probability of paying down or paying off their home they make perfect sense even with near record low interest rates on fixed mortgages.
As a Realtor in Boise, Idaho; already two of my buyer clients in 2015 have opted for Hybrid Mortgages. One of them is in college and the other is an upwardly mobile professional. I would not suggest using these types of loans if your income is stable and you plan on living in the house for longer than the initial term of the adjustment since I firmly believe the interest rates will be signifcantly higher at the adjustment period than they are today!