New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
- advertisement -
Bankrate.com
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Equity
Auto CDs &
Investments
Retirement Checking &
Savings
Credit
Cards
Debt
Management
College
Finance
Taxes Personal
Finance

Pros and cons of adjustable-rate mortgages

Dr. Don TaylorDear Dr. Don,
On the so-called ARM loans like a 5/1 ARM, what is this intended for? Does it favor the lender or the client? Can we refinance a 5/1 at the end of the first three years?
-- Robert Redux

Dear Robert,
A 5/1 ARM is a hybrid mortgage. A typical adjustable-rate mortgage resets annually. A 5/1 ARM has a fixed interest rate for the first five years before it adjusts to a new rate based on the short-term interest rate it is priced on and the pricing spread.

Lenders like adjustable-rate mortgages because they shift interest rate risk to the borrower. The hybrid ARM allows the borrower to get a lower interest rate than a 15-year or 30-year fixed-rate mortgage because the borrower accepts the interest rate risk after the initial fixed-rate period.

- advertisement -

Hybrid ARMS are available as 3/1, 5/1, 7/1 and sometimes even as 10/1 structures. They can benefit the borrower if the borrower doesn't expect to be in the home much longer than the fixed-rate period. So the lender and the borrower can get to win-win by setting an initial fixed-rate period that suits the borrower..

Your ability to refinance a 5/1 ARM depends on where interest rates are at that point in time and the cost of refinancing, including whether there's a prepayment penalty. It would be pretty unusual for a prepayment penalty to go out past three years, but the loan agreement would spell that out upfront.

In general, you shouldn't go into a 5/1 ARM with the idea that you'll be able to refinance at a lower rate down the line. We're at the end of a period of Fed easing, and the Federal Reserve has already started a cycle of tightening, which means rates are going up. What its mindset will be three to five years from now nobody knows, but counting on refinancing to be advantageous during the fixed period of a 5/1 hybrid ARM doesn't make sense. Bankrate's Mortgage Adviser can help you decide which mortgage structure best meets your needs.

 
-- Posted: Oct. 6, 2004
     

 

 
 

Looking for more stories like this? We'll send them directly to you!
Print   E-mail

30 yr fixed mtg 4.08%
48 month new car loan 3.21%
1 yr CD 0.66%
Alerts


Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS

BASICS SERIES
Begin with personal finance fundamentals:
Auto Loans
Checking
Credit Cards
Debt Consolidation
Insurance
Investing
Home Equity
Mortgages
Student Loans
Taxes
Retirement

MORE ON BANKRATE
Ask the experts  
Frugal $ense contest  
Quizzes  
Form Letters


- advertisement -
 
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here.

Bankrate.com ®, Copyright © 2014 Bankrate, Inc., All Rights Reserved, Terms of Use.