Longer term adjustable rate mortgage saves buyers $68,000

Mortgage banker: Terry Hastings

Home value: $ 750,000

Loan amount: $600,000

Loan terms: 4.5 15/1 arm Backstory: Hastings received a call from a couple who was referred by their Realtor. They were thinking of purchasing a home but were concerned about the sharp rise in interest rates over the past year. How were other people dealing with it and what were their options?

Hastings first collected information about their income and assets to pre-approve them for a mortgage loan. He explained that the type of loan was based upon a number of questions, including how long they intended to occupy their home and if they expected any life or career changes that could alter their plans.

The borrowers were told by their parents to always get a 30-year mortgage because they felt the adjustable interest rate was far too risky.

Hastings explained to them that if they were thinking longterm, the short adjustables were indeed a risk. An adjustable rate mortgage freezes the rate for an agreed upon number of years and then changes every year afterwards based upon market conditions.

In the past, there were three, five, seven and even 10-year ad- justable loans, but these made the buyers nervous.

Hastings told them about a new loan out that was a 15-year adjustable. While the rate was frozen for 15 years, it was still based upon a 30-year term. Because it was an adjustable, the rate was .625 percent cheaper than the 30-year fixed saving $225 every month! The borrower still wasn’t convinced and Hastings explained another benefit.

If the borrower took the 15/1 arm with the $225 savings over the 30-year fixed and applied it to his monthly payment, it would pay his loan off faster since the extra money would go directly toward his principal. Their loan balance after 15 years on the conservative 30-year loan would be about $408,000, but the rapid payoff on the 15-year arm with only $225 per month added would make the balance $340,000, a savings of $ 68,000.

Worst case, even if they wanted to refinance, the lower balance would drop their payment.

Based upon Hastings’ explanation and the mortgage math, the buyers went with the adjustable rate.