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LendingTree Analysis Indicates Greater Savings with Adjustable-Rate Mortgages, yet Fixed-Rate Loans are the Growing Majority

CHARLOTTE, N.C. May 23, 2012

May 2012

However, a recent analysis by LendingTree shows that even in a worst-case adjustment scenario, the typical 5/1 adjustable-rate mortgage using today’s rate is a better option for the first 93 months. Said another way, a borrower is financially better-off with a 5/1 ARM if they plan to move or refinance within 7 years and 9 months after closing the loan.  According to the U.S. Census Bureau, Americans move or refinance every 6-7 years on average, making the current adjustable rate mortgage a viable option for the average homeowner.

Loan Amount: $225,000

Break Even Point (maximum adjusted rate): 7 years, 9 months

Program

 

Rate

 

Monthly Payment

 

5 Year Cost

 

ARM Advantage

(at 60 months)

5/1 ARM

 

2.75%

 

918.54

 

$55,112.40

 

$9,338.4  saved

 

30-yr Fixed

 

4.00%

 

1074.18

 

$64,450.80

 



 

1.25%

 

$155.64



In a worst-case scenario, typical 5/1 ARM rates would adjust to its maximum period cap of 2.00% annually, up to its incremental lifetime adjusted cap of 6.00%. Using this assumption, the incremental increases are shown below.

Monthly Payments 60 through 71

Program

Rate

Monthly Payment

Annual Cost

ARM Advantage

5/1 ARM

4.75%

1135.19

13622.28

$9338.40 Saved during first 60 months

30-yr Fixed

4.00%

1074.18

12890.16

($732.12) Cost difference during period

Difference

0.75%

61.01

732.12

th

Monthly Payments 72 through 83

Program

Rate

Monthly Payment

Annual Cost

ARM Advantage

5/1 ARM

6.75%

1368.05

16416.6

$8606.28 (Amount saved vs fixed after 6 years)

30-yr Fixed

4.00%

1074.18

12890.16

($3526.44) Cost difference during period

Difference

0.75%

293.87

3526.44

th

Monthly Payments 84 through 96

Program

Rate

Monthly Payment

Annual Cost

ARM Advantage

5/1 ARM

8.75%

1613.54

19362.48

$5079.84 (Savings with 5/1 ARM after 7 yrs)

30-yr Fixed

4.00%

1074.18

12890.16

$5079.84 / $539.36 (monthly pmt) = 9.4 months

Difference

0.75%

539.36

6472.32

BREAK EVEN POINT = 93 Months

Doug Lebda $130

The risk of rising interest rates is should be considered and evaluated as payments could potentially become unaffordable as the 5/1 ARM adjusts annually.  Although for homeowners who are confident they will be able to refinance before the rate adjusts or for those who are planning to move within 5 to 7 years, an adjustable rate mortgage has the possibility of saving thousands of dollars on mortgage payments. 

About LendingTree, LLC
$214 billion mortgages refinance loans www.lendingtree.com Facebook page @LendingTree


Megan Greuling

[email protected]

SOURCE LendingTree

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