ARMs Good Fit for Short-Term Borrowers

For months, ever since the economy started strengthening, experts have predicted that mortgage rates would start to rise. It just hasn’t happened because of a variety of factors.

Chief among those are worries over the Greek debt crisis, which has spurred demand for safe U.S. Treasury securities. High demand drives bond prices up, causing yields to fall, driving mortgage rates down. The 30-year fixed-rate mortgage is now sitting at about 5%, according to the survey. That’s the lowest since early December.

That’s a terrific rate, and most borrowers are wise to lock that in for the long term. But borrowers with a short ownership horizon or a stomach for risk might take a look at two other products offering unusually good deals: five- and seven-year adjustable-rate loans.

These carry a fixed rate for the first five or seven years, then reset the rate according to market conditions, typically every 12 months. The five-year ARM averages just 4.069%, according to the survey. The search tool shows numerous lenders charging even less. The seven-year deals charge about the same, while providing two more years of protection against a rate hike.

According to HSH Associates, the mortgage data firm, the five-year ARM is the most popular alternative to the 30-year fixed-rate loan.

If you’re planning to stay put for the long term — 10 years or longer — the 30-year fixed-rate deal could well be best, as you won’t ever have to worry about paying a higher rate. But a five- or seven-year deal could be worth the gamble if you figure you’ll have the loan for only seven, eight or 10 years.

Imagine you wanted to borrow $300,000 and had a choice between a five-year ARM starting at 4% and a 30-year fixed loan charging 5%. Let’s assume that after the first five years the ARM rate would jump by 2 percentage points a year until it hit a lifetime cap of 10% — a worst-case scenario.

According to the ARM vs. Fixed-Rate Calculator, you’d be better off with the ARM if you expected to have the mortgage for less than 10 years and six months.

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