Jumbo Mortgage ARMs: When Is an ARM Right for You?
Interest rates for jumbo ARM mortgage loans are near or at all-time lows. Rates for 5/1 ARMs may be as low as 2.625%/2.751 APR which would save $15,000 per year in interest when compared to a 30 year fixed for a $1,000,000 loan amount. But when is an ARM (adjustable rate mortgage) right for you?
Here are some questions to consider:
How long do you plan on staying in your home? Some borrowers have a very specific plan on when they plan on selling based on retirement goals, when their children will finish college, etc.
Do you have substantial financial assets? If, after your initial fixed rate term, the ARM adjusts to its maximum interest rate, do you have enough cash to pay down your mortgage or will you be comfortable with the higher monthly payment?
Are you comfortable with refinancing? Some borrowers like to play the “ARM game” by refinancing to an additional ARM when their rate is about to adjust.
Do you understand how interest rates work and how ARMs work? Before considering an ARM, it is crucial to understand when your rate will adjust, what index will be used to determine the new rate and what are the interest rate caps associated with your adjustable rate loan.
Mike Dulla, President of United Home Loans, sees many borrowers starting to take advantage of the lower interest rates offered through ARMs. “Borrowers will save $10,000 to $15,000 per year in interest for a 7/1 ARM and 5/1 ARM as compared to a 30 year fixed for a $1,000,000 loan amount. If a borrower applies those savings to their principal balance, they will see a much smaller loan amount in 5 or 7 years when their rate adjusts. In addition to building more equity, that also helps to mitigate some of the risk associated with the ARM. Obviously, your payment will not increase as much if your loan balance is substantially lower when the rate starts adjusting.”
Dulla also states that many borrowers look to refinance to another ARM once their rate is about to adjust. “For good reason, borrowers are concerned that 30 year fixed rates will be at 7% or 8% or higher when rates adjust. But if 30 year fixed rates do go to 8%, where will a 5/1 ARM be at that time? Maybe 5%? Your average interest rate over that 10 year period will still be lower than the current 30 year fixed rate in this example.”
That said, ARMs are not for everyone. Make sure you understand all risks associated with adjustable rate mortgage loans.