With mortgage rates near historic lows, many experts advise home loan shoppers to lock into today’s low borrowing costs with 30-year or 15-year fixed-rate loans. But can it still make sense to go with an adjustable-rate mortgage instead?
Perhaps. Whether it makes sense for you depends on the monthly payment, how long you plan to stay in the house and other particulars in your life.
“ARMs are a great planning tool to use,” says Bill Howe, president at National Association of Mortgage Brokers based in Fairfax, Va. “(But) it’s not for people who will have to refinance once the fixed term is up.”
Despite today’s low rates, mortgage shoppers who don’t plan to stay in their homes for a long period of time may find an adjustable-rate mortgage better suits their needs than a fixed-rate loan.
ARMs come in many varieties, including the commonplace one-year and 5/1 ARMs. With a one-year ARM, you pay a fixed interest rate for the first year and than the current interest rate each year thereafter.
With a 5/1 ARM, you pay a fixed rate for the first five years and then the mortgage rate is set for one year terms until it’s paid off.
ARMs often have a lower interest rate than fixed-rate mortgages. But these types of mortgages can be risky — once the initial rate expires, the monthly payment often increases as interest rates rise.
Greg Gwizdz, executive vice president and national sales manager at Wells Fargo Home Mortgage in Des Moines, Iowa, urges borrowers to choose a loan that offers a payment “you are comfortable with.”
“No matter what product you choose, you have to make sure it’s within your budget,” he says.
A mortgage calculator can help you zero in on an affordable monthly payment in light of your income.
Although ARMs can be beneficial for some borrowers, today’s low mortgage rates make fixed-rate loans a tempting option for many borrowers. These loans allow consumers to lock into low borrowing costs for years or even decades.
If you choose a fixed-rate loan, should you opt for a 30-year loan or a 15-year loan?
A 15-year loan can cut your mortgage term in half, and the rate is generally lower than on a 30-year loan. However, the compressed time frame of the mortgage means the monthly payment on a 15-year loan can be as much as — or more than — that of a 30-year loan.
“A 30-year fixed rate is a much safer loan,” says Scott Fowler, a mortgage broker and president of Horizon Financial in Simpsonville, S.C. “You’re not locked into a higher payment every single month.”
Many homeowners today weigh the “30-year vs. 15-year” dilemma as they decide whether to refinance and take advantage of today’s historically low mortgage rates. Fowler suggests refinancing into a 30-year loan, then paying more to the principal when you can.
In this way, you can still pay off your mortgage more quickly but won’t have to worry about making a higher payment if you can’t afford to do so.
Some lenders offer fixed-rate terms beyond the 30-year and 15-year varieties. For example, Wells Fargo can structure mortgages in yearly increments, Gwizdz says.
That means the length of the loan could be 17 years, 23 years or whatever the borrower needs.
Borrowers who can’t decide whether to opt for an ARM or a fixed-rate mortgage should check out Bankrate’s ARM vs. fixed-rate mortgage calculator.