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

• January 24, 2014

by Lark Turner

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