Whether you\u2019re looking for a mortgage or not, what the Fed is up to with interest rates is on everyone\u2019s radar these days.<\/p>\n
The upheaval caused by the pandemic set the economy on a new course that no one could have predicted in 2019. The economic stimulation that we enjoyed from years of low interest rates was, in 2020, set on a course towards inflation. The steps taken to stabilize the economy have created a financial shift for people tackling larger expenses such as buying a house.<\/p>\n
Pre-Covid, over the course of four years from December 2015 through October 2019 the Fed raised interest rates in twelve increments from .25% to 1.75% \u2013 by today\u2019s perspective a minor shift. On March 3rd<\/sup> of 2020, the rate was reduced to 1% and on March 16th<\/sup>, a further reduction to .25%. This remained unchanged until March of 2022 when the incremental increases began, rising from .25% up to 4.5% in one year alone, making this growth the fastest rate hike in history. To date, 2023 has seen an additional .5% increase.<\/p>\n What does this mean for a home buyer?<\/u><\/p>\n As a consumer, putting the brakes on inflation has helped us all with our day-to-day expenses. But as a home buyer, the extra percentage points have caused some reflection and readjustments to the best way to finance a house.<\/p>\n Five years ago, it was a no-brainer to lock into a rate and adjustable rate mortgages (ARMs) were less popular. In this high-rate environment, though, taking an ARM could be an easier path to acquiring property.<\/p>\n Why take a rate that might change?<\/u><\/p>\n The main reason would be that the rates, and therefore the payments, would be lower to start with. And remember that rates are cyclical, so in a few years you should be able to refinance.<\/p>\n Understanding ARMS<\/u><\/p>\n Adjustable rate mortgages come in 3, 5, 7, 10 and 15 year options. They are written like this: 5\/1, 7\/1, 10\/1, 15\/1. This means that the loan is set for the initial amount of years and then adjustable every year after that for the life of the loan.<\/p>\n Each ARM rate has annual caps, lifetime caps and a floor:<\/p>\n Annual Cap<\/strong> \u2013 \u00a0 This is how much the loan rate can move starting with the first adjustment period.<\/p>\n The 3\/1 and 5\/1 have annual caps of 2% \u2013 this means your rate cannot go up or down more that 2%.<\/p>\n The 7\/1, 10\/1, and 15\/1 ARMS, however, often have a 5% jump for the first adjustment if index has greatly exceeded the starting rate. But any following rate increases can only go up a maximum of 2%.<\/p>\n Lifetime Cap<\/strong> \u2013 These are either 5% or 6% above the start rate.<\/p>\n Floor<\/strong> \u2013The floor is the lowest your rate can go and is determined at closing. It can never be lower than margin.<\/p>\n Example \u2013 You have a 30-year loan at 5\/1 with a start rate of 5.5%. In year 6, the most your rate can change in any given year is 2%, potentially making your rate 7.5%. However, it does not have to change the full 2% \u2013 this is based on where the Fed has rates at the time. And the lifetime cap for this scenario would be 11.5% if interest rates moved high enough to allow that.<\/p>\n Once they are allowed, changes of rate are based upon the combined rate of Index plus Margin.<\/p>\n 12 Month Treasury (aka 1 Year CMT)<\/p>\n Sofi Index<\/p>\n If this amount is greater than your current rate, your interest will go up by the difference, not to exceed 2%.<\/p>\n The initial rate of a loan is usually not tied to anything. It\u2019s a teaser rate that the bank chooses to give you. But that rate is yours for the time period you select and it can\u2019t be changed during the initial commitment period.<\/p>\n \u00a0<\/p>\n ARM vs Fixed Rate Loan<\/u><\/p>\n Here\u2019s an example of the initial difference between the two with a $500,000 loan.<\/p>\n 5\/1 at 5.5% \u2013 payment is $2,839<\/p>\n 7\/1 at 5.625% \u2013 payment is $2,878<\/p>\n 10\/1 at 5.75% \u2013 payment is $2,918<\/p>\n 30 year fixed at 6.5% \u2013 payment is $3,160<\/p>\n Savings from having an ARM (for 5, 7 or 10 years) vs 30 Year Fixed<\/p>\n 5\/1 \u2013 savings in 5 years $19,260<\/p>\n 7\/1 \u2013 savings in 7 years $23,688<\/p>\n 10\/1 \u2013 savings in 10 years $29,040<\/p>\n Is an ARM for Me?<\/u><\/p>\n Generally, if you know you will be in your home for a short amount of time, ARMS really make sense. Or simply for a savings in what you need to pay out monthly.<\/p>\n But everyone\u2019s situation is different and the best way to figure out if an ARM will work for you is to meet with a mortgage broker. Our extensive experience will allow us to point you in the right direction so you can find the best product for your particular needs.<\/p>\n<\/body>","protected":false},"excerpt":{"rendered":"\n
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