Will a Hybrid ARM Save You Money?
Romi Carrell Wittman of the Tucson Citizen plans to move to the Northwest Side of town. That is, if she can sell her other house first.
She’s in no rush to move, so she at least has the luxury of time. The crazy days of double-digit appreciation are over - as are the days of the adjustable rate mortgage.
ARMs were introduced in the 1980s and quickly became a popular financing mechanism for homeowners looking for the lowest possible monthly payment.
In 1984, fully two-thirds of all home loans were ARMs. Unlike traditional 30- or 15-year fixed-rate loans that offer a fixed mortgage rates over the life of the loan, ARM interest rates adjust, either up or down, over the life the loan according to the prevailing market rates.
During the 1980s, when 10-11 percent rates were not uncommon, ARMs were a boon to folks trying to lower their mortgage payments. But now, with 15- and 30-year loan rates so low, ARMs have lost much of their appeal.
Enter the hybrid ARM.
Like regular ARMs, a hybrid ARM adjusts according to the market. However, they offer a fixed rate for an introductory period, generally one, three, five or seven years. After the introductory period ends, the loan adjusts, or floats, according to the market.
Hybrid ARMs offer more security than traditional ARMs in that the interest rate is fixed for a period of time. This is ideal for people who don’t anticipate staying in their homes long or expect a mortgage refinance.
But there are some things to bear in mind.
Thirty-year fixed mortgages are still at record lows. In today’s market, a hybrid ARM will only save you about 0.18 of a point in interest vs. a conventional mortgage loan.
If you plan to stay in your home, you’ll likely refinance in a few years, a move that can cost several thousand dollars. Plus, you run the risk that interest rates will rise in a few years meaning the home mortgage loan refinance rate could turn out to be significantly higher than the 30-year fixed rates you can get today.
It pays to do a little homework to determine if, in the long run, a hybrid ARM really will save you money.