Give Adjustable Rates a Chance

Well, it’s officially official. As of April 14th, the Freddie Mac national average rate, on a 30-year mortgage, is 5.0% with 0.8 fees/points. We are now in what some will consider a “high rate” environment. In my opinion, that’s not an accurate assessment, but that’s not what I’m here to talk about today.

Today, I’m here to discuss the benefits of an adjustable rate mortgage (ARM). I’m willing to bet that there’s a lot more benefit to them than you think. Adjustable rates are a great option when in a rising rate environment. The rate on an ARM doesn’t start adjusting right out of the gate. They almost always have a fi xed portion in the beginning. Now, the entire term of the loan is most commonly 30 years, but the most common length of the fixed portion of the rate are 3 years, 5 years, 7 years, and 10 years. For example, if you were in a 5-year fixed adjustable-rate mortgage, then whatever rate you received when you closed the loan would be locked, and would not adjust, for 5 years. On the beginning of the sixth year, your rate would start adjusting. Some ARM programs adjust every six months, and some programs adjust annually (once a year). How much the rate adjusts would be based on two things, 1) the adjustment cap; this means the rate cannot adjust up or down more than the rate adjustment cap, and 2) the rate of whatever index your loan is attached to. An entire book can be written about indexes, but a couple of the most popular are the Secured Overnight Financing Rate (SOFR), and the 1-Year Treasury Rate.

This is all great, but where’s the benefit? Why would you go with an adjustable-rate mortgage over a fixed rate mortgage? First, the adjustable rates are almost always lower than the conventional fixed rates. Second, if rates remain on the same trajectory as they are now, as long as your initial, annual and lifetime caps, are at a reasonable amount (example, initial and annual cap of 2%, and a lifetime cap of 6%), then your net cost on the loan will be tens of thousands of dollars less than the fixed rate option.

Let’s put some numbers to this. For the fixed rate option, let’s use the 30-year fixed national average of 5% (APR 5.193%), and for the adjustable-rate mortgage (ARM) let’s use a 7-year ARM, at 2.99% (APR 3.311%). For starters, the monthly principal and interest payment on the ARM will be $486 less than the fixed rate mortgage monthly principal and interest payment. At year 7 of the ARM, you would have paid $50,435 less in interest, compared to the fixed rate mortgage. You would have also paid down your principal balance an additional $16,735 with the ARM. This is a huge difference! Hopefully you walk away from this learning that adjustable-rate mortgages are not a bad loan program, and that in today’s environment it’s worth looking at them as a viable option to accomplish your mortgage goals. Give me a call and let’s see if an adjustable-rate mortgage will work for you!

Derek Graber
Originating Branch Manager
NMLS1064034
M 808.445.4038
E derek.graber@myccmortgage.com

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