More ARM Options Becoming Available for Luxury Home Buyers

Adjustable Rate Mortgages have a fixed rate for a specific amount of years prior to becoming variable, increasing or decreasing dependent upon normal interest rates. Although the time period differs and is typically as long as 7 or 10 years, a 5-year fixed rate is the most common. A change in the interest rate of your loan will result in an increase or decrease in your monthly payment.
Adjustable rate mortgages make up roughly 30% to 40% of private jumbo loans with Bank of America and close to 50% of private loans circulated by North American Savings Bank Financial. Private loans are not sponsored by the federal government. Many lenders agree that buyers with a large net-worth are less prone to risk due to the fact that they have access to liquid capital to pay off a loan if there was a sudden increase in interest rates was to occur.
A representative from PNC Wealth Management shared that his firm has noticed an increase in the amount of clients that have decided to go with ARMs over the past few years. According to data released from the Mortgage Bankers Association, adjustable rate mortgages were responsible for 4.2% of total mortgage applications in the month of July.  Data released from The Wall Street Journal indicates that that adjustable mortgage loans made up 34.9% of private home loans in the month of July.
Interest rates on jumbo 5/1 adjustable rates mortgages are when the interest rates stays the same for the initial 5 years then modifies annually. The average is 2.82% which is almost half of the average interest rates are for a 30-year fixed rate jumbo at 4.06%. Borrowers who take advantage of the 5/1 ARM  would save roughly $90,900 in interest with a $1.5 million mortgage.
Some lenders favor ARMs due to the fact that when the Federal Reserve increases interest rates, banks will have to increase the interest rates on deposit accounts and will get larger payments from ARM borrowers if their interest rates increase. Listed below are a few of the potential threats linked with adjustable rate mortgages.
Interest Rate Increases – When the fixed-rate period is over, interest rates may increase. Based on a today’s 5/1 adjustable rate mortgages, interest rates could climb roughly 5 percentage points throughout the sixth year of the mortgage. These rates could also increase up to 2 percentage points every year after the 6th.
No Way Out – Adjustable rates mortgage borrowers have the option of refinancing into a fixed-rate mortgage if their current interest rates started to increase, but the borrower may end up investing the same as with ARMs.
Home equity could hinder refinancing – Home loan borrowers who have made the decision to refinance as an out from an adjustable rate mortgage should be sure to validate that they have enough equity to make this happen. Borrowers are also encouraged to make a 30% minimum down payment when purchasing a new property.  Not taking heed to these suggestions could cause borrowers to pay a portion of the loan amount in order to refinance or having to deal with your current mortgage situation.

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