The Fixed Is InBut which kind of mortgage would be the best in the current economic climate? Because mortgages vary as much as the banks that offer them, not many financial advisers offer a definitive answer. However, many agree that a fixed-rate mortgage offers low risk at a great price. "Any time when rates are at historical lows, it makes sense to lock in a fixed rate for whatever period of time you want to be in your homes," says Nancy Anderson, a chartered financial analyst with New Perspectives in Clinton, Miss.
|Last Chance? |
How low can 30-year fixed-rate mortgages go?
|Year||Average Annual Rate|
|Source: Freddie Mac|
Some Could Take Up ARMsBut fixed-rate mortgages aren't for everybody. Let's take a look at two other options: ARM and hybrid mortgages. Typically, an ARM mortgage begins 2 to 3 percentage points below the fixed rate, but then changes at intervals depending on market conditions. For example, a 5-1 ARM offers a fixed rate for the first five years before it switches to a variable rate. A hybrid mortgage is basically the same as an ARM mortgage, but differs in that it offers the discount below the fixed rate for a longer period of time. Because of the way that ARM and hybrid mortgages are structured, those who plan to move soon may want to consider them. "ARMs are attractively priced now," says Jack Guttentag, professor of finance emeritus at the University of Pennsylvania. For those moving within the next five to 10 years, such alternatives to the fixed-rate mortgage offer a short-term benefit. In other words, if you can get out of an ARM or hybrid mortgage before it switches to a variable rate, you could possibly save some cash. Say you're 58 years old, with $100,000 left to pay on the mortgage. In four years, you plan to retire to a condo in Arizona. Your best bet is to take out a 5-1 ARM, which currently has a rate of 5.72%, according to Bankrate.com. With a 5-1 ARM mortgage, you'll pay $19,845 in interest for the first four years, which is better than the $22,577 you'd pay under a 30-year fixed-rate at the current levels. The only risk is that if, by some chance, you do stay in your home past the expiration of the fixed-rate portion of the mortgage, the variable rate can skyrocket as much as 5 percentage points, Guttentag says. The rate could also drop lower, but that isn't likely because the rates are currently so low. Before you commit to either an ARM or hybrid, make sure you understand exactly how the rate varies, or you could be shocked when the payments jump.
|Shrinking Window |
Refinancing activity falls as rates climb
|$194 billion||$1.14 trillion||$521.7 billion*|
|Source: MBAA |