4.25% 30 Year Fixed Rate
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Program Rate APR
30-Yr fixed 4.750 % 0.7 to 1
15-Yr fixed 3.750 % 0.7 to 1
5/1 ARM 3.125 % 0.7 to 1
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The Benefits of an Adjustable Rate

For homeowners, borrowing costs are a major concern. Homeowners searching for the best mortgage rates available play a big role in the housing market. The most basic component of that market, the mortgage, has undergone significant changes in the past 20 to 30 years. One of the biggest is the abandonment of solely relying on the 30-year fixed-rate mortgage for other varieties, including mortgages with adjustable rates. Adjustable-rate mortgages (ARMs) are a recent innovation that has introduced new benefits into the housing market for homeowners. Homeowners now have a greater chance of finding the best mortgage rates for their needs.

How ARMs Work

An ARM’s rate adjusts based on rising and falling interest rates throughout the economy. ARMs use certain indexes to measure rising and falling rates. A common benchmark the 1-year Treasury Constant Maturity index, published by the Federal Reserve and based on a range of Treasury securities adjusted to equal a maturity of one year. Alternatives include the London Interbank Offered Rate (LIBOR). An ARM features an initial period of low introductory rates, which are usually much lower than rates on other similar loans. The adjustment periods begin after the introductory rate expires. An adjustment period is simply the time that passes between rate changes.

The Primary Advantages

The homeowner shoulders the risk of interest rates rising in the future, whereas the bank assumes that risk with a fixed-rate mortgage. In exchange, the bank will likely start them off on a lower interest rate. If interest rates do rise, the homeowner’s payment can rise dramatically, putting plenty of strain on the family budget. To manage this risk, the homeowner can apply for an ARM that has caps on how high the interest rate can rise. Then they can plan ahead instead of suffering a costly series of increases every year or so.

Why They Work As They Do

ARMs were heavily securitized during the 1980s, 1990s and the recent housing bubble. This means that the bonds made from securitized ARMs are traded on the secondary market. Prices on all bonds move inversely with yields, so stronger investor demand pushes the price up and the yield down. Combined with record-low yields on Treasury securities and record-low yields on mortgage-backed securities (MBS) in general, this has pushed adjustable mortgage rates down significantly. Homeowners are now in a position to take advantage of even lower adjustable mortgage rates thanks to the introductory period if they act.