ARMs & Out-Of-Whack Pricing
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The government reports today that interest levels for fixed-rate 30-year loans reached 5.13 percent in February — up a touch from 5.06 percent in February 2009.
What’s really amazing, however, is the interest level for adjustable-rate mortgages. In February a typical ARM was priced at 5.03 percent.
You have to wonder: Why would any sentient being want an ARM at these rates? For an initial saving of .10 percent you get the joy of future unpredictability with an ARM. The probability of rates going significantly lower is just about zero. The probability of rates going higher is a mortal lock.
Imagine that you want to borrow $200,000 over 30 years. At 5.13 percent your cost for principal and interest each month for a fixed-rate loan is $1,089.59. For an ARM at 5.03 percent your monthly cost for principal and interest falls to $1,077.31.
In other words, for the instability and risk of an ARM mortgage you save $12.28 a month.
The better alternative — the obviously better alternative — is to take the fixed rate loan. If rates rise you’re protected. And if rates fall significantly you can refinance and pay little or nothing in cash at closing (the costs of closing are reflected in a somewhat above-market interest rate).
Ah, but what about the more liberal qualification standards associated with ARMs? You can borrow more with an ARM.
If you need the extra borrowing power of an ARM to buy real estate then you really should think about purchasing a less expensive — and more affordable — property.
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