In the last few months, 30-year borrowing rates have increased from approximately 3% to 5% - basically a 2-point increase%! While 5% isn't particularly high by historical standards, it's much higher than rates have been in the last decade and especially in just the last year. This sharp increase in interest rates drastically increases the monthly payment of borrowers - roughly a 13% increase in monthly payment for every 1-point increase in the rate. We don't want this for our home buyers, and we wanted to suggest a product that may help you to combat these rising rates.
Normally a fixed-rate mortgage is considered the safest and wisest product when shopping for a home loan. However, given current conditions, an adjustable-rate mortgage may actually be more advantageous to you as a borrower for at least five reasons.
- The spread between a 30-year fixed rate and an adjustable rate is significant. As an example, a 7/1 adjustable-rate mortgage (ARM) is around 4.1% today compared to 5.0% for a 30-year fixed rate. That equates to $322 per month in savings for a $600,000 loan!
- Unfortunately, home prices are not expected to come down any time soon. Costs continue to rise for houses and pretty much any good or service we purchase. Buying a home is a good way to lock in the cost of your housing payment even as inflation persists. An ARM may be the difference between qualifying now for a home rather than waiting and waiting while prices keep rising. A lender will qualify you based on the adjustable rate, which we've already mentioned could reduce your monthly budget by more than $300.
- ARMs typically come in with 3-year, 5-year, 7-year, or 10-year term. But, according to the National Association of Realtors, the average home owner moves every 13 years, and in Boise, Idaho they move every 8 years. That suggests that you'll probably not live in your house as long as you think you will.
- Even if you were to live in your house for 10+ years and interest rates had actually gone up substantially during that time, your lender could only adjust your rate up at a limited increase one time each year. You would have some protection each year against any drastic upward adjustments in your rate.
- Today the yield curve is flat or even slightly inverted. The 2-year treasury note is nearly as high as the 10-year and the 30-year bond. This suggests that interest rates are high now but are not necessarily expected to remain high long term. It is likely that any future adjustment to your ARM will be a downward adjustment, not an increase to your borrowing rate. Your loan will adjust downward every year after the term of your ARM if prevailing rates have dropped. This is a great way to take advantage of falling rates without incurring the costs of refinancing.
For all of these reasons, we think an adjustable-rate mortgage may be something for you to seriously consider during these current market conditions rather than paying more money for a fixed-rate mortgage or waiting it out while home prices continue to appreciate.