Monday, April 14, 2008

Amputate the ARM

In this segment, we'll explore a bit of financial surgery. Adjustable Rate Mortgages or ARMs are a particularly nefarious form of home mortgage. People commonly get these based on the lower initial interest rate. However, in 3 or 5 years, depending on the terms, the rate will adjust and almost assuredly it will be in an upward direction. These mortgages have played a big factor in the the subprime mortgage crisis. When rates adjusted upwards people hadn't budgeted for an increase in house payment and got hit hard by the increase.

At current rates, ARMs primarily benefit banks by protecting them from having to offer low rates for a longer period of time. From a historical standpoint, the fixed rates available today are nearly as low as they have ever been. The current 15 year fixed rate posted on is 5.21%. This is an awesome long term rate.

Now is the time to move if you are in an Adjustable Rate Mortgage and convert it to a fixed rate hopefully no longer than 15 years. Also factor in closing costs but all things considered this is a great time to switch over to a fixed rate.

An additional benefit of a 15 year mortgage versus a 30 year is that you will save a substantial amount of money in interest payments. We'll use the previously mentioned rate of 5.21% with a 15 and 30 year fixed rate on a $120,000 mortgage. The 15 year mortgage results in total interest paid of $53,187 and a monthly payment of $659. The 30 year mortgage results in $117,485 in interest paid with a payment $962. So we can cut out 15 years of slavery to the bank and $64,298. Where I come from that's something you can hang your hat on.

Thanks to for the mortgage calculator.

So, go ahead amputate that ARM!

No comments:

Related Posts Plugin for WordPress, Blogger...