I want to buy a home in Denver. Is getting an Adjustable Rate Mortgage (ARM)a good idea? ARMs certainly have a bad reputation right now, and in many ways, deservedly so. ARMs accounted for 70% of all mortgages issued during the boom and have been blamed by many for the bust. But now it appears that ARM's are making a comeback and Freddie Mac predicts by the end of the year they will make up 10% of all new mortgages this year.
So is it a good idea to go with an ARM when buying a new home? That all depends on how long you think you are going to be in a home. The average rate for a 5 year ARM is 3.5% Compare that to a 5% average for a 30 year fixed and you can see the obvious difference in rate. On a $200,000 mortgage, the monthly ARM payment at 3.5% would be $898 compared with $1,074 for a 30-year, fixed-rate loan at 5%.
According to CNN Money, that's a$10,560 difference after five years, when the ARM would adjust. At that point the ARM rate could jump to a worst-case scenario 8.5% and the monthly payment to $1,538. It would still take more than 22 months of the higher ARM payments to offset the first five years of savings. Even under a worst case scenario, you're better off with an ARM if you're planning to live in the house for less than seven or eight years.
What got people in trouble before was the very short term periods of ARMs, those that adjusted after the first year or two. But now it appears that if you plan on staying in your home for no longer than seven years, then an ARM might be the way to go and you will actually save a significantamount ofmoney. It is an important decision, so definitely discuss the options with your lender and see what is a best fit for you.
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