by Pat Zaby
October 5, 2010 10:08 AM
"Why would anyone even consider getting an Adjustable Rate Mortgage when the Fixed Rates are so low?" The reason should be obvious; if it will result in a lower cost of owning the home.
Not all people are good candidates for ARMs but some can save a considerable amount of money. While most first time buyers may not fit the profile, people who are financially savvy, risk tolerant and possibly have owned several homes might be. A person who is subject to transfer on a regular basis or knows they won't stay in the home long term definitely fit the profile.
The amount of the savings should definitely be a motivator. Currently, you can get a 5/1 FHA ARM for 2.75% and the maximum adjustment is only one percent per period and five percent over the lifetime. A $241,250 mortgage would have a first period payment of $984.88 generating a $201.92 monthly savings for the first five years over a 4.25% Fixed Rate Mortgage.
The big surprise that most people are not aware of is that the unpaid balance on the ARM will be considerably lower than that of the FRM at the end of five years - $5,578.00!!! The total savings with the ARM in the first five year period is $17,693.
The effect of the lower unpaid balance will actually lengthen the breakeven point. And, if the buyer would get an ARM but make the payments like a FRM, the additional principal contributions would lower the payment at the next adjustment period even if the rate did go up.
