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Should I Take an Adjustable Rate Mortgage?
By Ed Hlavac, CTX MortgageCompare the following examples of a fixed rate mortgage and an adjustable rate mortgage: |
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| Example 30 Year Fixed Rate |
Amortized $300,000 @ 6% = $1,798 |
Interest-only |
| 5/6 ARM | $300,000 @ 5% = $1,610 | $1,250 |
| Monthly Savings: $188 | $548 | |
| Savings compounded @ 2% for 61 months = $11,853 | $31,264 | |
If Index value triples: 5 Year ARM balance @ 61 months = $275,023 @ 8% = $2,123 |
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| Minus fixed payment $1,798 | ||
| Net increase: $325 | ||
| Savings divided by increase: $11,853 / 325 = 36.4 months |
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| 5 Year ARM, interest-only balance = $300,000 @ 8% = $2,000 | ||
| Minus fixed payment $1,798 | ||
| Net increase: $202 | ||
| Savings divided by increase: $31,264 / 202 = 154.7 months | ||
But because labor costs are a primary component of inflation: $5,000 monthly income @ 5% annual salary increases = $6,381 in 61 months. Much more than the mortgage increases. Real estate statistics say that you will have moved or refinanced by year number seven. The best price on the wrong product can cost you thousands of dollars! Whatever loan you choose, you are betting on future performance. You just know the outcome of the fixed rate loan. |
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Ed Hlavac ed.hlavac@ctxmort.com |
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