loading...

Lenders Shop a New Type of Loan, But is it Worthwhile?

by Lark Turner

image

A new adjustable-rate mortgage is being hyped as a way for home buyers to lock in great rates, but critics say the plan is entirely dependent on market timing, according to The Wall Street Journal.

The new mortgage, called the jumbo 5/5 ARM, has a fixed rate for five years and then resets to another rate for the next five years, usually repeating for the life of the loan. It’s being shopped to wealthier buyers.

Per the WSJ:

“Lenders say this mortgage provides borrowers with more certainty because the required monthly payments don’t change as often as they do on other ARMs. … Critics say this mortgage only works in borrowers’ favor if they happen to time the market right.”

Banks are trying to make the deal more palatable to buyers by offering various incentives alongside it, and are raising rates on 10/1 ARM plans that would lock in a rate for 10 years. Buyers concerned that the second five-year rate will be too high can sign up for a plan that would allow them to reset it earlier than scheduled, but at one bank mentioned, buyers who did so were penalized by a slightly higher rate.

So would you sign up for the jumbo 5/5? A buyer who gets lucky and times it right could lock in great rates. But if you sign up before rates fall or your five-year reset comes at an inopportune time, you could be kicking yourself for half a decade. A mortgage expert cited in the article called the plan a “crapshoot.”

This article originally published at http://dc.urbanturf.com/articles/blog/a_new_type_of_loan/8039

4 Comments

  1. David said at 1:24 am on Saturday January 25, 2014:

    This is not new, Pentagon Federal Credit Union has been offering a 5/5 ARM for years.  Coming out ahead versus a 30 yr fixed will depend on the initial rate and the maximum rate increase at the first adjustment.  The issue is how much you save with a lower rate for the first five years and how long after that it takes to burn off the savings.

  1. Rick said at 11:05 am on Monday January 27, 2014:

    The PenFed 5/5 ARM is a great product.  I snagged one in October with a 2.75% teaser rate and a 2% cap for each adjustment (7.75% lifetime cap).

    A hypothetical example on a jumbo loan ($750k):

    5/5 ARM
    Rate:  2.75% first 60 months, 4.75% next 60 months
    Tenor:  360 months
    Principal Payments (first 60 months @ 2.75%): $86,280.77
    Principal Payments (second 60 months @ 4.75%): $80,818.65
    Total Principal Payments (first 120 months): $167,099.72

    30-Year Fixed
    Rate: 4.25%
    Tenor:  360 months
    Principal Payments (first 60 months @ 4.25%): $68,942.28
    Principal Payments (second 60 months @ 4.25%): $85,233.47
    Total Principal Payments: $154,175.74

    Result: $12,923.67 more paid off in 10 years with 5/5 ARM than 30-year fixed.

    Couple the above with the fact that most mortgages are paid off (via sale of home or refinance) within 7 years and this is a no-brainer.

  1. Rick said at 11:23 am on Monday January 27, 2014:

    I see the PenFed teaser rate is now 3.00%.  Repeating the above example:

    5/5 ARM
    Rate:  3.00% first 60 months, 5.00% next 60 months
    Tenor:  360 months
    Principal Payments (first 60 months @ 3.00%): $83,202.27
    Principal Payments (second 60 months @ 5.00%): $78,650.01
    Total Principal Payments (first 120 months): $161,852.28

    30-Year Fixed
    Rate: 4.25%
    Tenor:  360 months
    Principal Payments (first 60 months @ 4.25%): $68,942.28
    Principal Payments (second 60 months @ 4.25%): $85,233.47
    Total Principal Payments: $154,175.74

    Result: $7,676.54 more paid off in 10 years with 5/5 ARM than 30-year fixed.

  1. JT said at 11:08 am on Thursday January 30, 2014:

    Rick is right on.  You can refinance just like any other mortgage too.  How is locking in to a rate for 30 years any less of a crap shoot?  Is a permanently higher rate somehow better than a lower rate for 5 years and the potential for it to stay low?  The key with the PenFed / First Savings program is that the first and all subsequent adjustments is only a max of 2% (5% lifetime).  With the typical 5/1 ARM it can go up 5% at the first adjustment if the benchmark rate dictates that it does.  Many borrowers, young people especially, are paying way more interest than necessary because they will only own the home for 5 - 10 years.  You can’t take your super low 30 yr fixed mortgage with you to the next property…why pay more interest and less principal than you need to?

Join the discussion

UrbanTurf now requires registration in order to post comments. Register here, or login below if you are already registered.

Click here if you forgot your password.



DC Real Estate Guides

Short guides to navigating the DC-area real estate market

We've collected all our helpful guides for buying, selling and renting in and around Washington, DC in one place. Visit guides.urbanturf.com or start browsing below!

Northern Virginia

Profiles of 14 neighborhoods across Northern Virginia

Ballston
Looking to Give People A Reason to Stay Past 6pm
Clarendon
Happily Straddling the Line Between City and Suburb
Columbia Pike
Arlington’s Neglected Stepchild is Getting a Makeover
Crystal City
Turning Lemons into Lemonade
Lyon Village
Developing An Air of Exclusivity?
Rosslyn
Hitting Its Growth Spurt
Shirlington
An Urban Village Hitting Its Stride
Del Ray
Virginia’s Small Town Near the Big City
Eisenhower Avenue
The Vibrancy Might Take a Few Years
Huntington
The Quiet Neighborhood By the Beltway
Old Town
Mayberry By The Potomac
Parkfairfax
132 Commerical-Free Acres
Downtown Falls Church
Staying the Same in the Midst of Change
Tysons Corner
Radical Change Could Be On The Way

See more Northern Virginia »

Maryland

Profiles of 14 neighborhoods in suburban Maryland

Annapolis
Small-Town Living in the State Capital
Bethesda
Bedroom Community Gets Buzzing Cache
Cabin John
In With The New While Maintaining the Old
Chevy Chase
Affluence, Green Lawns and Pricey Homes
Downtown Silver Spring
Experiencing a Resurgence After a Bumpy History
Potomac
A Suburb on Steroids
Rockville Town Square
Despite the Dynamism, Still Somewhat Generic
Takoma Park
More Than a Little Bit Quirky
Wheaton
A Foodie Magnet on the Verge of Change
Capitol Heights
Kudzu, Front Porches and Crime
Hyattsville
Glass Half Full or Half Empty?
Mount Rainier
Artists, Affordable Homes and A Silo Full of Corn
National Harbor
A Development Rises Next to the Potomac
Riverdale Park
A Town Looking For Its Identity

See more Maryland »

Northwest DC

30+ neighborhood profiles for the city's biggest quadrant

16th Street Heights
DC's Sleeper Neighborhood
Bloomingdale
Where (Almost) Everyone Knows Your Name
AU Park
One of DC’s Last Frontiers Before the Suburbs
Brightwood
DC’s Northern Neighborhood on the Cusp
Burleith
DC’s 535 House Neighborhood
Cathedral Heights
Do You Know Where That Is?
Chevy Chase DC
Not to Be Confused With the Other Chevy Chase
Cleveland Park
Coming Back After A Rough Year
Columbia Heights
DC’s Most Diverse Neighborhood, But For How Long?
Crestwood
An Island of Serenity East of the Park
Dupont Circle
The Best of DC (For a Price)
Foggy Bottom & West End
Where the Institutional Meets the International
Forest Hills
Ambassadors and Adventurous Architecture
Fort Totten
Five Years Could Make a Big Difference
Foxhall Village
350 Homes Just West of Georgetown
Friendship Heights
A Shopping Mecca With a Few Places to Live
Georgetown
History, Hoyas and H&M
Glover Park
One of DC’s Preppier and More Family-Friendly Neighborhoods
Kalorama
A Posh View From Embassy Row
LeDroit Park
A Quiet Enclave in the Middle of the City
Logan Circle
Trendy Now, But Not By Accident
Mount Pleasant
Sought-After Homes Surround Main Street in Transition
Mount Vernon Triangle
From Seedy to Sought-After
Palisades
The Long, Skinny Neighborhood at the City’s Northwest Edge
Park View
It’s Not Petworth
Penn Quarter/Chinatown
DC’s Go-Go-Go Neighborhood
Petworth
Getting a Vibrancy of Its Own
Shaw
The Duke’s Former Stomping Ground
Shepherd Park
DC’s Garden of Diversity
Spring Valley
A Suburb With a DC Zip Code
Takoma
Not To Be Confused With Takoma Park
Tenleytown
Not Quite Like Its Neighbors
U Street Corridor
The Difference a Decade Makes
Woodley Park
Deceptively Residential
Adams Morgan
No Longer DC’s Hippest Neighborhood, But Still Loved by Residents

See more Northwest DC »

Southwest DC

The little quadrant that could

Southwest Waterfront
A Neighborhood Where A Change Is Gonna Come

See more Southwest DC »

Northeast DC

Profiles of 10 neighborhoods in NE

Brookland
New Development Could Shake Up Pastoral Peace
Deanwood
A Little Bit of Country Just Inside the District’s Borders
Eckington
Not to Be Confused With Bloomingdale
H Street
A Place To Party, and To Settle Down
Langdon
The Northeast Neighborhood That Few Know About
Michigan Park
A Newsletter-On-Your-Doorstep Community
NoMa
Evolving from a Brand to a Neighborhood
Rosedale
Ripe for Investment Right About Now
Trinidad
The Difference 5 Years Makes
Woodridge
Big Houses, A Dusty Commercial Strip and Potential

See more Northeast DC »

Southeast DC

6 neighborhoods from Capitol Hill to East of the River

Capitol Riverfront
Still Growing
Hill East
Capitol Hill’s Lesser Known Neighbor
Congress Heights
Gradually Rising
Hillcrest
Notable for Its Neighborliness
Historic Anacostia
Future Promise Breeds Cautious Optimism
Eastern Market
A More European Way of Living

See more Southeast DC »

Upcoming Seminars ▾