An Adjustable or Fixed Rate Mortgage For Your Fort Lauderdale Home?

There was a really good article in The Wall Street Journal this weekend called “Home Loans: A Call to ARMs?” that mentions how the spread between the interest rates on a 30 year fixed and a 5 Year Adjustable Rate Mortgage (ARM)  is an 123 basis point (1.23%) difference is on pace to be the widest it has been in 8 years. 

That is very enticing but you need to be very careful if you are to take on an ARM especially when interest rates are at historic lows.  You never know what the future holds and unless you are 100% certain you will be able to pay it off in that time period I would suggest getting a fixed rate loan.  Some are calling for further declines home values in Fort Lauderdale and South Florida and if you can’t sell your home or pay it off you could be in trouble.  Remember though, every 1% increase in interest rates reduces your buying power by 10% so even if home values do drop your low interest rate can offset that decline if it in fact does occur. 

Also, it depends on what your loan amount will be.  On a $100,000 mortgage it isn’t as big of a difference in your mortgage payment as it would be for a $300,000 loan.  Every borrower’s situation is different.  You are not your neighbor or someone else you spoke to that did or got such and such on a loan.  

Here is how a 5/1 ARM works: After the first five years, rates typically adjust each year and can move either up or down. During the sixth year, the maximum amount they can increase by is 5 percentage points. Each year after that the rate can move by 2 percentage points, as long it doesn’t surpass the loan’s maximum lifetime cap, which is 5 percentage points above the initial fixed rate. That means the lifetime cap on a loan made today at 3.4% would be 8.4%.