ARMs Crack Four Percent Threshold

ARMs Crack Four Percent Threshold

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Mortgage rates continue to drop, nearing historic lows. This is good news for first time home buyers who may also be eligible for an $8000 federal tax credit which expires on November 30, 2009. Zillow.com reports that 30-year fixed-rate mortgages are now about 5% while adjustable rate mortgages (ARMs) have dropped below 4% in some cases.

Dropping mortgage rates are helping home shoppers become homeowners.
Dropping mortgage rates are helping home shoppers become homeowners.

Zillow reports that the national average for a 5/1 ARM is now 3.94%, one of the lowest rates of all time. A 5/1 ARM – also known as a variable rate mortgage – offers a fixed rate for the first five years of the mortgage. Beginning with the sixth year the rate adjusts as it is tied in with either the LIBOR (London Interbank Offered Rate) or the one-year U.S. Treasury index. If the typical payment schedule is followed, this type of mortgage is usually paid off after thirty years.

The ARMs Advantages, Disadvantages

ARMs are advantageous for many homeowners because they allow them to enjoy lower monthly payments for the first few years of the mortgage. However, ARMs have also caused millions of homeowners grief over the past few years as low-rate ARMs eventually reset to the higher rate, adding hundreds of dollars to many people’s monthly mortgage payments. Quite a few ARMs were sub-prime mortgages, one of the catalysts contributing to the current housing crunch.

Clearly, if you choose an ARM you need to take into consideration a later reset. The problem some consumers faced is that in advance of their reset, they didn’t qualify for a new mortgage as their economic position changed for the worse or they were simply deemed no longer creditworthy to refinance their homes. An ARM can be useful for the person who expects that they will sell their home before the initial low rate financing period comes to an end.

Get A Larger Loan

ARMs also let buyers take out a larger loan, which is helpful if you don’t have as much money to put down or if you need a larger house. However, given the current economic squeeze, many lenders are no longer willing to risk extending loans beyond certain tighter restrictions. This means that although you may be able to swing larger payments, the bank isn’t willing to offer expanded financing.

Finally, it does pay to shop around for a mortgage. Though credit is still relatively tight, if you have very good or excellent credit, you should be able to obtain the best rates available.

Adv. — Visit LetsRenovate.com to find pre-screened home contractors too. Check out our free online planning sheets, helpful tools which will enable you to get the job done.

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Categories: Home Financing

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".