Current ARM rates 5-year, 7-year, and 10-year
Current ARM rates 5-year, 7-year, and 10-year
Exploring Adjustable-Rate Mortgages: A Deeper Look into Pros, Cons, and Current Rates
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When it comes to saving money on mortgage payments, adjustable-rate mortgages (ARM) can be an attractive option. Let’s take a closer look at what ARM rates are currently trending, compare them to fixed-rate mortgages, examine the pros and cons of ARMs, and explore whether it’s a good idea to opt for an ARM in 2023.
Current ARM Rates: Not the Best Deal Right Now
In July, 7/1 ARM rates averaged around 6.72%, while 5/1 ARM rates averaged around 6.64%, according to Zillow data. These rates are significantly higher than they were in June and are comparable to the average 30-year fixed mortgage rate of 6.63% in July. These numbers indicate that an ARM might not be the most cost-effective option at the moment.
Another popular ARM length is the 10-year ARM, available in either a 10/1 or 10/6 ARM. With the longest fixed-rate period among popular ARMs, 10-year ARMs usually have slightly higher rates than shorter fixed terms.
Comparing ARM Interest Rates with Other Mortgage Types
To gain a better understanding of the current scenario, it is important to compare today’s ARM rates with other types of mortgages. This helps borrowers assess whether they can save significantly by opting for an ARM. However, it’s worth noting that ARM rates are not always substantially lower than fixed-rate mortgages. Sometimes, borrowers may find more savings by selecting a fixed-rate mortgage with a shorter term, such as a 15-year or 20-year loan.
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In March, ARM rates were about 50 to 60 basis points lower than average 30-year fixed mortgage rates, depending on the type of ARM. This implies that an average borrower with a $250,000 mortgage could save up to $90 per month by choosing a 5/1 ARM instead of a 30-year fixed-rate loan.
Understanding Adjustable-Rate Mortgages (ARMs)
The term “ARM” stands for adjustable-rate mortgage. When considering a mortgage, borrowers must decide between a fixed or adjustable rate.
Fixed-rate mortgages feature a consistent interest rate for the entire loan duration. This means that your monthly payment will remain largely unchanged, except for adjustments in tax and insurance costs.
On the other hand, adjustable-rate mortgages start with a fixed rate for a specific period. Once this initial fixed period expires, the rate adjusts regularly based on an index tied to the rate.
For example, a 7/1 ARM will maintain the same interest rate for the first seven years, after which it will adjust annually. Similarly, a 5/6 ARM will keep the rate fixed for the initial five years, then adjust every six months.
Pros and Cons of ARMs
Pros:
- Lower rates: ARMs often provide lower interest rates compared to fixed-rate mortgages.
- Lower monthly payments: A lower interest rate leads to reduced monthly mortgage payments.
- Save on interest: Lower rates can result in significant savings on interest payments over time.
- Benefit from rate drops: When rates decrease after the fixed-rate period, monthly payments also decrease, providing additional budget flexibility.
Cons:
- Rate volatility: ARMs carry the risk of rates increasing, which can lead to higher monthly payments.
- Increased monthly payments: As rates adjust, monthly mortgage payments could rise beyond what was initially anticipated.
- No protection from rate spikes: During periods of rate spikes, borrowers may find themselves facing higher payments, potentially causing financial strain.
It’s important to note that many borrowers choose ARMs with the intention of selling or refinancing before the fixed-rate period expires. However, there is no guarantee that these plans can be executed successfully. Mason Whitehead, a Dallas-based branch manager for Churchill Mortgage, shared his personal experience with a 5-year ARM. He initially believed he would sell the property within three to four years, but due to market conditions related to the housing bubble burst in 2008, he ended up holding onto the property for a decade and was unable to sell it. This highlights the importance of being prepared for the worst-case scenario and having the financial capacity to handle escalating payments.
Is an ARM a Good Idea in 2023?
Opting for an ARM largely depends on whether rates are expected to decrease by the time the rate adjusts, or if there is confidence in being able to sell or refinance before that adjustment. Major forecasts indicate that mortgage rates will likely trend downward in the coming years. The Mortgage Bankers Association forecasts a drop to 4.9% for 30-year fixed rates by the end of 2024.
However, mortgage rates are notoriously unpredictable, influenced by various factors such as the economy, the Federal Reserve’s actions, and unexpected events like natural disasters or pandemics, as seen in 2020. Therefore, borrowers considering an ARM should prepare for worst-case scenarios and ensure they can comfortably afford the mortgage even with potential payment increases.
“Borrowers should consider their financial situation and ability to absorb potential rate increases before getting an ARM,” advises Mike Rhoads, owner of real estate investment company Rhoads Home Buyers. He further suggests being aware of the ARM’s terms and features, including the index it is tied to, the margin, and any caps on interest rate adjustments. Mortgage lenders can provide borrowers with information regarding the potential monthly payment increases at each adjustment and the maximum lifetime payment amount.
Use Mortgage Calculator for Better Clarity
To gain a clearer understanding of how a lower rate can affect monthly mortgage payments, Insider offers a free mortgage calculator. This tool allows borrowers to visualize the potential difference and impact a lower rate could make in their financial planning.
Frequently Asked Questions about ARMs
For those seeking further information, here are answers to some commonly asked questions about adjustable-rate mortgages:
- What are current ARM rates?
- In July, 7/1 ARM rates averaged around 6.72%, while 5/1 ARM rates averaged around 6.64%.
- How do ARM rates compare to fixed-rate mortgage rates?
- In March, ARM rates were approximately 50 to 60 basis points lower than average 30-year fixed mortgage rates.
- What are the pros of an ARM?
- Lower rates, lower monthly payments, potential interest savings, and the ability to benefit from rate drops.
- What are the cons of an ARM?
- Risk of rate increases, potential for higher monthly payments, and vulnerability to rate spikes.
- Is an ARM a good idea in 2023?
- An ARM can be a good option if rates are expected to decrease or if plans are in place to sell or refinance before rate adjustments. However, borrowers should be prepared for unexpected changes and ensure they can afford potential payment increases.
By understanding current ARM rates, comparing them to fixed-rate mortgages, and weighing the pros and cons, borrowers can make informed decisions when considering an adjustable-rate mortgage. It’s essential to consider personal financial circumstances and future projections before making a final choice.
