Should You Consider an Adjustable-Rate Mortgage?
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Here's your Money Briefing for Friday, July 8th. I'm J.R. Whelan for The Wall Street Journal. Mortgage rates ticked down to an average 5.3% this week. That's the second straight week of declines, but still two percentage points higher than where they were at the end of last year. With mortgage costs to consider, plus home prices that have risen as much as 20% in some cities, some prospective homebuyers are looking past the traditional 30-year fixed mortgage and exploring an adjustable rate mortgage. That comes with a promise of lower costs, but with those possible savings come risks.
I think it's also really important to think about what a lot of financial advisors told me. If you cannot afford the house on the 30-year fixed mortgage rate, you should not attempt to buy the house with an arm. You need to be able to afford an arm if you can tolerate the highest possible interest rate that arm could reach.
So how does an adjustable rate mortgage work? And why would someone consider it if mortgage rates are currently trending lower? Our personal finance reporter Veronica Dagger will be here with some answers after the break.
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What mortgage market conditions are driving interest in adjustable-rate mortgages?
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To buy a home, most people take out a 30-year fixed-rate mortgage. But an adjustable-rate mortgage, or ARM, is becoming more attractive to some people who are in the market for a new home and want to keep costs down. But what risks do they take on with an adjustable mortgage? Let's bring in WSJ personal finance reporter Veronica Dagger. Veronica, thanks for being with us.
Thanks for having me, JR.
So, Veronica, first of all, just refresh us on the basics here. How does an adjustable-rate mortgage differ from a traditional mortgage?
So a traditional mortgage is typically a 30-year fixed mortgage. So what that means is that the interest rate on that mortgage is fixed for the period of time that you have the mortgage. The adjustable rate mortgage differs in that typically in the early years of an arm, another name for adjustable rate mortgage, you'll have a lower rate. And then after a certain period of time goes by, that rate increases or decreases depending on what's happening in interest rates.
How do adjustable rates typically compare with what we often see as a 30-year fixed rate?
Well, some are lower, some are higher than the 30-year fixed. Right now, the 30-year fixed is at 5.3%. That's as of July 7th, according to Freddie Mac. Average rates on adjustable rate mortgages for the week of July 4th range from 4.25% to 5.46%. And that really depends on the loan terms and that status according to Bankrate, and they survey large national lenders.
So why have adjustable mortgages become popular again?
According to the Mortgage Bankers Association, 9.5% of mortgage applications submitted the week ending July 1st were for adjustable rate mortgages. And that's up from around 3% in early January. More people are getting ARMs because they're looking to save money on their upfront payments.
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