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Mortgage ARMs Become Attractive Again

Jun 16, 2008
Rates on 15 and 30 Year Fixed loans have been pretty stable the last month. In contrast mortgage rates on 5 and 1 year ARMs have been falling. 1 Year rates fell from 5.22 to 5.06 this week. This is the lowest 1 Year Arms have been since early March. Its a little weird considering banks are losing a lot of money on ARMs from people going into foreclosure when they reset.

One would think that banks would be discouraging people from getting 5 and 1 year ARMs due to the problems they are having from people that got ARMs over the last few years. Instead with a full point difference between 30 Year Fixed and One Year Arms they seem to be pushing ARMs on potential borrowers. Below is a history of mortgage rates for the last few weeks.

June 5,2008
30-yr 6.09 15-yr 5.65 5-yr 5.51 1-yr 5.06

May 29,2008
30-yr 6.08 15-yr 5.66 5-yr 5.62 1-yr 5.22

May 22,2008
30-yr 5.98 15-yr 5.55 5-yr 5.61 1-yr 5.24

May 15, 2008
30-yr 6.01 15-yr 5.60 5-yr 5.57 1-yr 5.18

May 8, 2008
30-yr 6.05 15-yr 5.60 5-yr 5.67 1-yr 5.29

May 1, 2008
30-yr 6.06 15-yr 5.59 5-yr 5.73 1-yr 5.29

Using a mortgage calculator lets run some numbers and look at what the rates would translate into today and a month ago. The 15 Year Mortgage is higher because the loan is paid off in a shorter period of time. In contrast the 5 year ARM has a interest rate that is only fixed for 5 years but is designed to be paid off in 30 years.

June 5th
30-yr $1210.69
15-yr $1650.11
5-yr ARM $1136.83
1-yr ARM $1080.98

May 8th, 2008
30-yr $1205.53
15-yr $1711.46
5-yr ARM $1157
1-yr ARM $1109.36

A few months ago it seemed to make sense to get a 30 Year Fixed over a 5 Year ARM because there was not a big difference in the monthly mortgage payment you would be facing. As of today that is no longer true. On a 200k loan there is a $73.86 difference in the monthly mortgage payment between a 30 Year Fixed and a 5 Year ARM. ARMs are still a problem because your mortgage payment can reset when you are not ready for it. For instance I have heard stories of people losing their jobs a week before their mortgage interest rates resets to a higher number. But with the large difference in today's rates makes it hard to ignore the cost savings one would get with a 5 Year ARM.

If you consider getting an ARM I would advise saving the difference of $73.86 a month and setting that aside for when the ARM resets. That way if the ARM resets to a higher rate the cash reserve that has been built up for the last 5 years can be used to pay the potentially higher mortgage payment. If you sell before your ARM resets you can just consider that savings a bonus.
About the Author
Ki works at a small independent brokerage covering Austin Texas real estate . They have information on mortgage interest rates along with a free mortgage calculator.
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