According to many mortgage experts, we can expect mortgage rates to jump in 2019. If you are thinking about buying a home, you may want to pull the trigger soon. In fact, a new forecast estimates that average mortgage payments will jump nearly 10% by early 2019.
New data from CoreLogic finds that the typical mortgage payment will increase by 10% by March 2019 because of rising rates, inflation and higher home prices. All in all, it is expected the average mortgage payment will come to $942, which is quite a jump from the average of $859 we saw this year in March.
The CoreLogic forecast also says there will be a 4% increase in home prices and an increase in mortgage rates of 46 basis points.
Given the fact that rates and home prices are heading up in 2019, on the fence home buyers may want to consider an ARM loan next year.
An adjustable rate mortgage offers you a fixed interest rate for an introductory period of five, seven or 10 years before the interest rate changes based upon a common index, such as LIBOR. How often your ARM rate will adjust depends upon the loan details. For example, a 5/1 ARM has a fixed rate for five years and then adjusts once per year. Rate hikes are capped as well. So, borrowers do not face big increases in their payments each month.
The reason people are considering ARM loans in this rising interest rate environment in 2018 and 2019 is the rate is considerably lower than a 30-year fixed rate loan. As of late 2018, a 30-year fixed rate loan is approximately 4.85%. You may be able to get a 5/1 ARM fixed at 4.5% or so for the first five years before it adjusts.
ARMs got a bad reputation when the housing bubble burst in 2008. Some of those ARMs have resets after just one or two years. They also had big prepayment penalties and no caps on the rate hikes. This could mean that borrowers may not have even been able to make payments to cover the interest, which increased what was owed each month. Those features have been eliminated from modern ARM loans.
ARMs are good for people who want to sell their home before any increase in rate can affect their payment in a negative way. Also, people who can surely expect their income to go up before the first hike kicks in, such as a resident who is going to become a doctor, are also good candidates for an ARM.
A person who gets an ARM should be financially savvy, have a solid income, low payment to income ratio, and a good amount of cash in savings.
An ARM is also good for someone who is willing to take a longer-term financial risk for short term financial gain. If you are willing to gamble on what interest rates will look like in five or seven years, an ARM may work for you.
An ARM can be a good idea if you have average credit today, but you think that your credit will improve in a few years. If you have some black marks on your credit that will drop off next year, you may be able to secure a low fixed rate loan at that time.
The major problem with an ARM for some people is the higher level of risk. ARMs require you to take on risk with your most important asset – your home. If your home value goes down or you hit some financial problems, you might not be able to do a refinance or sell your home before your rate increases hit. Getting trapped in an ARM they could not afford was what caused many people in the last downturn to lose their homes. But remember, ARMs of that era had more risk. Today, there are caps on how much rates can rise in a year, and a cap on how much rates can rise during the entire loan life.
For some people getting a fixed rate loan still may be a better option even in a rising interest rate environment. You know what your rate will be for the life of the loan. You will pay a bit more to have more security in your life. Even with fixed interest rates at 5%, this is still a very good deal in the long term.
But if you are able to shoulder more risk, or you think that you will be moving in a few years, you could consider an ARM.
References: https://www.valuepenguin.com/2018/03/mortgage-rates-are-rising-should-you-consider-arm
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