Daily Dupaco

Tuesday, August 20, 2013

Fixed-rates rise but the sky's not falling

Sure, fixed-rates are on the rise. But historically speaking, home loan rates remain near multi-decade lows.

And some prospective homebuyers have another affordable tool in their back pocket that they might not have considered.

Adjustable-rate mortgages, or ARMs for short, remain at rock bottom, about 3 percent, according to a recent Home & Family Finance Resource Center story.

"ARM rates typically are indexed to rates on shorter-term securities, and most of the recent spike in rates occurred in longer-term securities," Mike Schenk, vice president of economics and statistics for the Credit Union National Association, explained in the story.

HOW IT WORKS
With an ARM, the adjustable rates are fixed for a short term. So if you choose to do a 5/1 ARM, for instance, the mortgage rate is only fixed for the first five years. After that, the interest will adjust based on the current index, plus the margin.

"The ARM loans are not fixed for the life of the loan,” says Krystal Frederick, a mortgage consultant with Dupaco. "Buyers have to keep in mind at some point the interest rate will be going up, and this will cause the monthly payment to increase as well."

WHEN TO USE IT
ARMs work best for homeowners who know the loan will be short-term. For example, the homeowners know they will sell the home in the next five years, or they know they will accumulate enough money to pay the loan in full before it comes out of the fixed-rate financing.

Homebuyers are slowly returning to ARMs. Earlier this month, 6 percent of mortgage applications were for ARMs, up from 4 percent in early May, according to a USA Today story.

WHEN TO AVOID IT
But homeowners should avoid an ARM when they plan on having the mortgage loan long-term or "when they qualify for fixed-rate financing and the rates are as low as they are today," Frederick says.

If you're in an ARM poised for an increase, it might make sense to refinance if you plan to stay in the house several more years, advises the Home & Family Finance Resource Center. Another possibility: Take a shorter term now, if you can afford the larger monthly payment, since shorter-term mortgage rates are still low.


By Emily Kittle

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