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Gregorio Denny

ARMs - Use As Directed

Wednesday, May 11, 2011 - Article by: Gregorio Denny - Brookstone Mortgage Corporation - Message

Adjustable rate mortgages (ARMs) got a bad reputation during the collapse of the subprime mortgage market, as a result, many now regard them as risky, and to a certain degree, they can be when not "used as directed." Unfortunately, many lenders used them as a way to offer credit to marginally qualified borrowers, often coupled with variations like interest-only payments, or negative amortization resulting in loans that could not be sustained unless housing prices continued to rise. When housing prices fell, many defaulted on these loans. However, for well-qualified borrowers with a realistic view of their finances, an ARM can be a sound decision. Initial rates on ARMs are currently running over a full percentage point lower than comparable 30-year fixed-rate loans, in some instances more than 1.5 points lower. The savings can be significant as demonstrated below.

The interest rates are used as a sample and not necessarily the rates offered as of today.

$300,000 Loan amount assuming a May 1, 2011 first payment.

5/1 ARM rate 2.75%
30 Year Fixed rate 4.5%

The 30 year payment is $1,520.06
The ARM payment is $1,224.76

By taking the 5/1 ARM, but making the same payment ($1,520.06) as if you had a 30 year fixed, in May of 2016, your balances would be:
$274,946.28 for the 30 year fixed
$246,514.46 for the 5/1 ARM
You have $28,431.82 more equity after 5 years of making the same payment.

The scenario above is one example of how using an adjustable rate mortgage with a lower interest rate can pay down principal faster by making the exact same payment each month as the 30 year fixed. If you were planning on selling, that would be $28,000 more equity in your pocket after 5 years. This may not be the right solution for everyone, especially those staying in a home long term, but you should at least explore the option with your loan officer to see if an ARM could work for you. WeFixRates.Com

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