John Marbury.com

A case for Adjustable Rate Mortgages (ARMS)

A case for Adjustable Rate Mortgages (ARMS)

 Adjustable Rate Mortgages (ARM’s)

With the recent increase in rates ARM’s have recently become a more popular way to finance a new home purchase.  See Chart below found on Freddie Mac’s

 

Webesite:https://www.freddiemac.com/pmms

 

 

Before the run up in rates there was no incentive to finance with an ARM because the ARM  rates were higher than the Fixed rates.  Now borrowers can lock in their loans 5 to 10 years with a 30 year amortization at significantly lower rate than the traditional 30 year or 15 year fixed. This is a good option if the borrower believes they are going to be in the house less than the initial lock period, or is open to the risk their mortgage rate will  go up if they keep the mortgage longer.  

The most important part of a loan is the initial rate and the term of the lock.  Below are our rates as of 5/11/2022.  The first number is the years of the initial lock years and the 2nd is the number of months it will adjust afterwards.  Below the lock years are for 5, 7 & 10. They all adjust every 6 months afterward.  

5/6 SOFR ARM = 4.500% +/- (5 year fix that adjusts every 6 months afterward)

Initial Cap 2% (6.5% Max) Subsequent 1%  Lifetime 5% (9.5% Max)

7/6 SOFR ARM = 4.625% +/- (7 year fix that adjusts every 6 months afterward)

Initial Cap 5% (9.625% Max)  Subsequent 1%  Lifetime 5% (9.625% Max)

10/6 SOFR ARM = 4.875% +/-(10 year fix that adjusts every 6 months afterward)

Initial Cap 5% (9.875% Max) Subsequent 1% Lifetime 5% (9.875% Max) 

The index is the 30 Day average of the Secured Overnight Financing Rate (SOFR). After the initial lock period of 5, 7 or 10 years a margin of around 2.75% is added to SOFR which is 0.38272% as of 5/11/2022.  If the rate were adjusting using 5/11/22 the rate would be calculated as follows:

 

2.75% + 0.3872 = 3.1372 rounded to 3.125%.

 

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