Adjustable Rate Mortgages have been around for a while, but According to financial organizations over 94% of home purchasers choose to get a fixed rate home mortgage. This is great since mortgage rates are at the lowest in home buying history. But, did you know that a few of them will pay more interest than they would normally, based on the time that they will own the home.
You must consider this if you only plan on staying in the home for a few years, that an adjustable rate mortgage may save you money.
The interest rate on an adjustable mortgage is usually lower than a fixed in the first few years. If you look at amortization charts, then you may notice that the adjustable rate may actually amortize faster.
In the example shown below, a $200,000 mortgage for 30 years is compared using a 4.25% fixed-rate to a 3.25% 5/1 FHA adjustable rate. The first five years of the ARM generates a $113.47 a month savings which accumulates to $6,808.20. In addition, due to faster amortization on lower interest rate loans, the unpaid balance at the end of five years will be $3,001 lower on the ARM for a total savings of $9,801.
Assuming the adjustable-rate mortgage was to escalate the maximum allowed at each period, the breakeven would occur in 8 years and 6 months. If a person were to sell the home prior to this point, the ARM would provide a lower cost of housing for the homeowner.
For some people, the uncertainty of how the interest rate may change is not acceptable. On the other hand, for the risk tolerant individual who may be more confident in financial matters or who may know when they’ll be moving next, the ARM can be a smart choice.
Use this handy calculator to see the differenece: