On average, a typical mortgage is either paid off or refinanced every seven to 10 years. This occurs for many reasons such as people who own a first-time home trade up to a larger home; people who are near retirement sell their primary home; or interest rates may decline making refinancing a mortgage attractive. Knowing this, you may want to consider an adjustable-rate mortgage (ARM).
ARMs vs. Fixed-Rate Mortgages
As of May 1, 2017, LUSO’s 30-year fixed-rate mortgage has an interest rate of 4.000% while LUSO’s 5/5 adjustable-rate mortgage with a 30-year amortization has an interest rate of 3.000%.
The ARM remains fixed for the first five years at a 3.000% interest rate and then, at its first adjustment period at the end of five years, the mortgage rate could increase by up to 1%. Without even evaluating the impact on principal and interest, you can see that the average interest rate of the ARM is 4.000% over the first 15 years, assuming a full 1% increase at each interest rate adjustment, which is the same as the fixed rate of interest!
So, if you will be in your home for 10 years or less, you will have additional cash flow in the early years of your mortgage to do home repairs and/or prepay your mortgage! Additionally, by year 10, you will have saved $10,358.40 in interest. This savings could then be used to pay closing costs to refinance your mortgage or used towards a down payment on a new home! And with more principal paid down during years one through 10, you have more equity in your home as well. Imagine how much more you could grow your home’s equity if you paid the ARM like it was a 30-year mortgage.
When Should You Consider an ARM?
For illustration purposes, let’s review the first 10 years of the ARM loan assuming the worst-case scenario and that the full interest rate adjustment increase is 1% at the five-year adjustment period*. Remember, depending on market conditions, this loan could actually adjust down at an interest adjustment period!
Assuming a $200,000 mortgage with a starting interest rate of 3.000% for the ARM and an interest rate of 4.000% for the fixed-rate mortgage:
|Mortgage Term||ARM Interest Rate*||ARM Principal & Interest Payment||Cumulative Principal Repaid: ARM||Cumulative Interest Paid: ARM||FIXED Interest Rate||FIXED Principal & Interest Payment||Cumulative Principal Repaid: FIXED||Cumulative Interest Paid: FIXED||Cumulative Additional Equity: ARM vs. FIXED||Cumulative Interest Savings: ARM vs. FIXED|
Because everyone’s circumstances are different, we encourage you to contact one of our Lending Professionals to discuss your options so that you can make the right decision for you!
At LUSO Federal Credit Union, we are dedicated to providing our members with quality financial services and products. Our professionals can help you learn more about our adjustable-rate mortgages in Ludlow and surrounding towns. Our services and rates are available in Wilbraham, and Ludlow, Massachusetts. Contact us at our Ludlow branch at 1(844) 587-6328 or our Wilbraham branch at 1-(800) 808-5876 to learn more.