Home Buying Home buying: Is an adjustable-rate mortgage for you? With rates for fixed-rate mortgages in the high sixes, buyers wonder whether an adjustable one may be better. The average rate on a 30-year fixed mortgage was 6.95 percent Thursday — its second decline in two weeks. Last year, the rate hit a high of 7.22 percent in May and a low of 6.08 in September.
Interest rates for a 30-year fixed rate mortgage fell this week in the United States, but remain high at nearly 7 percent. With high interest rates, choosing the right mortgage may seem daunting. Fixed-rate mortgages are the most popular with home buyers, but are they the right choice for you?
With a fixed-rate mortgage, the interest rate is set when you take out the loan, and it will not change over time. Your principal and interest payments will remain the same each month, which may make it easier to budget, though your primary mortgage insurance and property tax payments will affect how much you shell out overall.
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With an adjustable rate mortgage, or ARM, interest rates can change based on market conditions. With an ARM, the borrower locks in a fixed rate for the introductory period, which is typically five years, but can be three or seven. During this introductory period, the rate doesn’t change and will likely be lower than that of the current fixed-rate mortgage. After that period, rates fluctuate, making the payments somewhat unpredictable.
The average rate on a 30-year fixed loan fell from 6.96 percent to 6.95 percent, mortgage buyer Freddie Mac said Thursday. A year ago, it averaged 6.63 percent, the Associated Press reported. Five years ago, it stood at 3.51 percent, according to the Federal Reserve Bank of St. Louis.
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About 40 percent of households in the United States have a mortgage, and about 92 percent have fixed rates, leaving the other 8 percent with an ARM, according to the Federal Reserve Bank of St. Louis.
So who is opting for an ARM?
“It depends on who you are, what your circumstances are, and what you can afford,” said Adam Guren, an associate professor of economics at Boston University. “The reason you would go for an ARM is if you think you’re going to move or refinance soon, or the interest-rate reduction is worth it, and you think your income may go up in the future.”
As Guren said, if you believe you may live in a home only for a limited period of time, then an ARM may be a smarter choice due to the low initial interest rate. But it will require you to put more thought into the future of the market.
Jeff Ostrowski, a mortgage analyst at BankRate, said that in his experience, people who take ARMs are typically those who work in the financial sector.
“They are people who are paying attention to rates,” Ostrowski said. “But most people don’t want to pay attention to mortgage rates, so for them the easiest product is just the 30-year fixed-rate loan.”
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The lower initial payments for an ARM may also help buyers more easily qualify for a loan. However, there’s obviously some risk involved with an ARM, because market trends can be somewhat unpredictable.
“There’s no right or wrong answer when it comes to deciding between a fixed-rate mortgage and an ARM,” Ostrowski said, “but our conclusion over the past couple of years has been that even as mortgage rates are going up, for most borrowers it makes most sense to stick with the fixed-rate mortgage.”
Home buying: Is an adjustable-rate mortgage for you?
