Take a glance at the latest BankingMyWay.com mortgage survey and you’ll see that rates on one-year adjustable-rate loans have gone up, while rates on 30-year fixed-rate deals are cheaper, with both hovering around 5%.
It raises a question: Are ARMs suitable for anyone these days?
Only a small subset of borrowers appears likely to benefit from adjustable loans in today’s market — people anticipating a financial windfall in the next few years. According to the Mortgage Bankers Association, adjustable-rate loans account for just 5.5% of recent mortgage applications.
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The popularity of ARMs waxes and wanes as market conditions change. There are two chief reasons to opt for an ARM, and neither applies today.
First, ARMs often start with a low initial rate that means smaller monthly payments than on a fixed-rate loan of the same size, at least for the first year or two. If the ARM starts out at 3.5% and the fixed loan at 5.5%, the savings can offset the risk that the ARM’s payments could rise over time. Also, an ARM’s low starting payment can make it easier for the borrower to qualify for the loan, or enable the borrower to get a bigger loan.
Unfortunately, ARMs currently offer no upfront savings, while they still pose the risk of rates someday rising above the 5% you can lock in with a fixed-rate deal. That makes an ARM unappealing.
Second, an ARM can be an acceptable bet if one believes interest rates will stay low for a number of years, or fall lower. That will keep the ARM rate low once annual adjustments begin.
But today’s rates are so low the odds favor them going up over time, not down.
