But, but, wait, wait...
it's "industry standard"!
SECU members and most consumers believe that a 30-year fixed rate mortgage is a better choice than an ARM.
It just appears to make common sense, that if a borrower can lock in a fixed rate, it has to be better than a mortgage with a rate which might move upward, right?
Most folks think that way and the mortgage industry works hard to make you continue to believe so - because it's in their best interest. But we'll look at that later, let's focus on just the individual borrower for this round.
First consideration: The interest rate on an ARM can "move" in three directions: 1) lower, 2) not at all, 3) or higher. Hope we can agree that we only need to study one of those possibilities, i.e. (#3), because if rates move lower (#1) the ARM borrower will pay less; and, if rates don't move at all (#2) the borrower also pays less because ARM rates are priced lower than fixed rate mortgages (check it out!).
So, in two of the three possibilities for market rate shifts, the SECU borrower will pay less with the 30-year ARM mortgage. Easy enough, shouldn't be any arguments there.
Second consideration: But its that last possibility of rising market rates on which consumers focus, fearing rising monthly mortgage payments which they will not be able to afford. A very reasonable concern, but lets look at the facts.
You should know that the SECU Board and staff always used to look for financial solutions which were better for the members and left extra money in their pockets. Isn't that what a member-owned cooperative is supposed to do? Over the years numerous types of ARMs were tried (1 yr, 2 yr, 3yr ARM versions etc). The 5-year ARM seemed to be the best fit and also is the mortgage most used in developed countries.
The example: The 5-year ARM rate can adjust only every 5 years by no more than 2% and by no more than a total of 6% over the 30 year life of the loan. In our example, we use the average price of a new home ($300,000) and a fixed rate of 6.25% and an ARM rate of 4.25%. (Doesn't matter which house price you use [down-payment, taxes, insurance other fees are assumed to be @ the same] or whether you use a different current market rate...the relative calculation results will be the same)
The monthly principal and interest payment on the 30-year fixed rate loan is $1,847 for the next 360 months (30 years).
The monthly principal and interest payment on the 5-year ARM is $1,476. the SECU borrower will save @ $22,260 ($1,847 - $1,476 = $371 savings per payment x 60 payments) over the first 5 years. If market rates decline or don't move, the SECU member will save at least another $22,260 in the second five years!
Worst case: But what happens if rates soar?!!? Well, the SECU member's rate will increase in years 6-10 to 6.25% and the monthly payment will be $1,847 - the same rate and payment as the 30-year fixed rate - except the member is still ahead $22,260! In year 11-15 if rates jump another 2%, then the $22,260 gain will disappear, but the ARM borrower will still be better off due to lower fees and mortgage insurance costs.
😎 An SECU ARM borrower in the worst case is a sure winner ($22,260!) in the first 5 years and no worse off through at least the first 15 years. If market rates decline, the SECU ARM borrower is a sure winner every year the ARM lasts. If market rates remain the same, the SECU ARM borrower is a sure winner every year the ARM lasts.
✅ Might note that the average 30-year mortgage lasts only 12 years. (A recent commenter said that it was now 7 years, not 12 years, which actually makes the case for the ARM even better!) Under any circumstances, few 30-year fixed rate mortgages last more than 12-15 years.
✅ Might also note that President Trump - and now the Federal Reserve - are predicting that market rates are declining - and will continue to do so.
