Word: armfuls
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...example, a homeowner who borrowed $200,000 in January 1993 at a 30-year fixed rate and refinanced every time rates fell 1.5 percentage points would have paid a total of $110,000 in interest and refi costs the following seven years. An ARM borrower would have paid just $100,000 over the same period. The ARM borrower did better in 87% of the rolling seven-year periods since 1989, an era of declining rates...
...Greenspan's view, this peace of mind simply comes at too high a price. Look at today's mortgage rates: the average 30-year fixed rate is 5.7% vs. just 3.7% for the average one-year adjustable-rate mortgage, or ARM, which resets every year. On a $200,000 loan, the fixed rate costs $1,160 a month, while the ARM costs just $921 a month for the first year. What happens after that is where it gets interesting. Within two years the ARM could rise as much as 4 percentage points, bringing the monthly payment to $1,407. Most...
...opting for that higher rate, though, homeowners win only if rates rise. If rates remain stable or fall, the ARM is by far the better deal because the rate starts out low and automatically adjusts downward without the cost of refinancing. Beyond that, Greenspan said, fixed-rate borrowers pay an excessive premium. In high finance there is a quantifiable cost to fix a rate for 30 years. Home-owners pay about 1 percentage point on their loan rate for it, while mortgage lenders (which must hedge their rate risk) pay less than half of that. Over the past 10 years...
Should you be in an ARM? In a time of rising rates, ARMs lose their advantage. That's no small caveat. Rates have been declining for most of the past 20 years, a cycle that has probably ended. Yet few economists expect rates to shoot higher and keep moving up. If rates rise 2 percentage points over several years, an ARM might still prove cost effective. Underlying the Fed chief's call to ARMs is that we could be in a low-rate environment for years...
...good ARM candidate if you live on a fixed income, and anyone planning to stay put for 10 or more years should lock in a fixed rate now. But the average homeowner sells after just seven years and thus would be better off in the right ARM...