Many homeowners skip ARM rates over 7 years
If you’re looking for a home but are only likely to live in it for a limited time, you might pay more with a Standard 30-year fixed-rate mortgage than you need.
A 7 year adjustable rate mortgage (ARM) could lower your monthly expenses and give you options for the future.
Many homebuyers and refinance consumers are too quick to turn down an ARM as an option. The rate and payment will eventually change – higher or lower – and that can be worrying. Nearly 95% of homeowners choose a fixed rate loan, according to mortgage software company Ellie Mae.
But a 7 year old ARM could be a “good risk” for mortgage customers. It provides bad reviews, and two additional years of fixed payments compared to the more popular 5-year ARM.
That extra time to sell or refinance could be the sweet spot for those who won’t keep their home for the full thirty years.
And in today’s mobile society, most homeowners are.
Homeowners don’t hold out long on their mortgages
As a rule of thumb, homebuyers stay in their homes for an average of seven years, although the exact amount is questionable.
A study by the National Association of Home Builders found that the typical home buyer stays for 13 years.
In either case, the general message remains the same. You will likely move before you withdraw your 30 year mortgage. That makes the home a medium-term investment.
If you don’t see yourself in the same house indefinitely, you may want to change the way you buy a mortgage. A 30 year fixed loan locks the interest rate for decades, but comes with higher interest rates and payments compared to an ARM.
Instead, a homebuyer could use 7 year ARM rates to spend less money during the time that you are home.
Check Your Mortgage Eligibility (June 14, 2021)
Elements of an ARM
An ARM is a type of mortgage that usually offers a very low interest rate that is fixed for a period of time.
After the initial fixed period, the price can be adjusted based on the current market. According to the Consumer Finance Protection Bureau, there are six factors to consider.
- Initial course: the interest rate during the initial lock-up period
- Adjustment period: how often the interest rate changes after the initial fixed interest period
- Index: a market rate that will be used to calculate the new mortgage rate when the loan is adjusted
- Range: the amount of interest percentage points that will be added to the index to determine the new mortgage rate
- Interest caps: Limits on interest rate increases during the adjustment period and the life of the loan
- Payment upper limit: a limit on the amount the monthly payment can increase
At the end of the initial fixed period, your new price would be the index plus the margin. The index can change, but the margin cannot.
For a seven year ARM, you would look at the index as you near the end of the first seven years.
At this point, if the index is 3.1 percent and the margin on your loan is 2.25 percent, you would start your first phase of adjustment at a rate of 5.35 percent.
7 year ARM loans offer built-in savings and protection
A 7-year ARM is one with an initial fixed term of seven years. The rate cannot change during this period.
For many homeowners, this time frame will exceed the amount of time they keep the home or mortgage. Remember, even if the homeowner doesn’t sell, there is a good chance they will get refinance just a few years after buying the home.
If you want to move or refinance within the 7-year term, an ARM can be much cheaper than a 30-year fixed-rate mortgage.
According to Bankrate averages, the seven-year ARM rates are more than 0.50% lower than the 30-year fixed rate loans.
That would save over $ 8,000 in interest over seven years on a $ 250,000 loan.
What if your plans change and you stay in the house or take out a mortgage for more than seven years? The 7 year ARM could still work fine.
The lifetime cap acts as a firewall on ARMs. Even in the event of an exploding interest rate market, you are largely covered.
For example, an ARM with an initial interest rate of 3% and a lifetime cap of 5% cannot rise above 8%. This limits additional costs if the market of the future is only selling slowly. And if it looks like you’re going to be staying in the house indefinitely, you may have the option to refinance into a fixed-rate mortgage.
What are the variable loan rates today?
Variable rate mortgages make home ownership extremely affordable. ARM rates are well below fixed rates, which are themselves at historic lows.
Home buyers today should request a quote for both an ARM and a fixed price and weigh the benefits.
Check Your 7 Year ARM Mortgage Eligibility (June 14, 2021)