Mortgage rates are hovering near all-time lows —averaging 3.63% for a 30-year fixed. As for ARMs? With rates so low on fixed-rate loans, ARMs are less popular. But more lenders are offering ARMs, and for certain consumers, an adjustable rate product may still make sense.
Hybrids Are Hot
So what's the most popular ARM? A 5/1 hybrid. With this mortgage, the rate is locked in for 5 years before it resets annually. The average 5/1 rate is 2.83% vs. 3.63% for the 30-year fixed.
So who gets an ARM? It's often people who know they are going to move within, say, 5 years or before the ARM resets. That could be people who know they're working in a certain location for only a few years.
ARMs are also more popular in markets where homes are more expensive — and people need higher balance loans.
The average ARM loan size (conventional ARM for home purchase) was more than $400,000 last year. That's about double the amount of an average fixed-rate loan.
In terms of early savings: On a $400,000 loan, a family would save about $9,000 in the first five years of a 5/1 hybrid vs. a 30-year fixed-rate loan. (Based on our survey data.) But keep in mind that's over the first 5 years, before the ARM resets to a possibly higher rate.
Today's low mortgage rates will not be around forever. Higher rates on both ARM and fixed-rate products, and further gains in home values, could lead more borrowers to opt for an ARM. In 2015, our economists expect the ARM share to rise to 12% of the conventional home-purchase market (compared to 10% in 2014).
What's Right for You
If you plan to be in your home for the long haul, a fixed-rate mortgage and the peace of mind it brings may make more sense — especially with average 30-year fixed rates the lowest since May 2013. (Note that rates are expected to rise in the second half of the year.) Learn more about your mortgage options.
Or, use our calculators (including fixed vs. adjustable rate) to run the numbers — and help you decide which options are best for you.
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