What to do Wednesday in Personal Finance? Is the Adjustable Rate Mortgage becoming extinct?

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I was reading an article last week that made the motion that adjustable rate mortgages (ARM) are dying.  For starters, adjustable rate mortgages are loans where the interest rate changes periodically.  Generally they are a good option when you are buying a house and the prevailing fixed rate mortgages rates are high.

This notion did not surprise me because interest rates are at historic lows for fixed rate mortgages.  You would be silly not to lock in a mortgage at these rates now, the interest rates are likely not going to get any lower than they are in your life time.  Listen they are at rock bottom now, I was having a water cooler discussion at work just looking for a consensus with my older  wiser co workers to see if they had ever seen or remember rates this low and none of them could! 

What do you think?  Do you have an ARM?  What was your reasoning for going with an ARM vs a fixed rate? 

Well my wife and I have a fixed rate loan.  We thought a few years ago that we had to lock in quick on our rate which is 5.00%, so we locked in at the onset of going through the process to secure the mortgage.  Little did we know that rates would continue to plummet!  Right now rates on a 30 year fixed rate mortgage are around 3.86% according to Bankrate.com.   

According to the Valentine’s Day press release from Freddie Mac, 95% of refinances were to fixed rate loans.  Historically, the ARM loans were great for people looking to have low fixed interest payments at the beginning of the loan then the variable afterward.  Why the great exodus from adjustable rate mortgages? 

Present fixed rate mortgages offer historically low interest rates.  You can lock into a 15 or 20 year loan at payment close to that of a 30 year in the past.  Rates on 15 and 20 year fixed rate loans have generally are a fraction of a percentage point lower in interest as well for the shorter term.  Homeowner fear of rising interest rates has caused a surge in refinance activity in the recent months.  Rates cannot go below 0% and 3.86% is pretty darn close to that, so why not a fixed rate? 

Just my two cents on the fixed rate mortgages, I do not think you will in the near future see lower rates than we are currently seeing today.  The Federal Reserve and Ben Bernanke do not see any interest rate increases in the foreseeable future. 

Get out there and get it refinanced or that dream house you were talking about!  But remember to fit it into your budget and make sure that you will indeed break even in your refinance. 

 

PHOTO BY: woodleywonderworks
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Comments

  1. Getting a 5/1 ARM at 2.625%. It’s my preference. 30 year fixed folks have been ripped off this past 10 years as rates continue to go down. The spread is too high!

    • @ Sam – I like that strategy as the rates are pretty low now for the ARM. The rates are not going to sky rocket over night and you likely will be ahead if you wait out the storm and see if rates continue to drop or if they are going to make a rebound. When they start to rebound then just consider a refi into a fixed rate. I am more of a risk adverse kind of guy and I take more security in the fixed rate knowing that it is never going to change. After a few years depending on where rates go, if we are going to refi, I will make sure to come back and see what you would do! Thanks for stopping by!

  2. Ah, the good old days of the ARM….. I remember our first home back 1981. It only cost $34,000………BUT came with an ARM of 14.25 to start for a 30 yr. OUCH! Back then, friends had a rate of 7% and NEVER did anyone imagine it ever going back down below 10. It probably would have cost close to a million if we kept the ARM, we re-financed at least 3 times to lock lower fixed rates.

    • @ Tim- Geez a mortgage with a rate of 14.25% that is really high. Now they are down below 5%. Glad you locked in the lower rates, I bet it saved a lot of money and peace of mind knowing your rates were now fixed!

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