(NASDAQ: RDFN) — The typical homebuyer could save about $15,582 over five years, or about $260 per month, by taking out a variable-rate mortgage rather than a 30-year fixed-rate mortgage. According to a new report by Redfin (redfin.com), technology-powered real estate brokerage.
Redfin’s analysis is based on estimated monthly mortgage payments on the home at the median asking price in the four weeks ending May 12 for 30-year fixed mortgages and 5/1 adjustable rate mortgages (ARMs). A 5/1 ARM is a loan where the interest rate is fixed for the first five years and then adjusts once a year for the remainder of the loan term, which is usually 30 years. Borrowers can also choose ARMs in which the interest rate resets after seven years, 10 years, and other terms, but Redfin’s analysis focuses on 5/1 ARMs, one of the most common types. popular.
The typical monthly payment for buyers who signed up for a 5/1 ARM was estimated at $2,164 in the four weeks ending May 12. That’s about 11% ($260) less than the estimated typical payment of $2,423 for buyers on a 30-year fixed contract. -mortgage rate.
Variable rate mortgages often come with lower interest rates, and therefore lower monthly payments, because buyers can only lock in their mortgage rate for a certain number of years. They have grown in popularity as mortgage rates have risen at their fastest pace in decades. The average interest rate on a 5/1 ARM was 3.98% in the week ending May 12, while the average rate on a 30-year fixed mortgage was 5.3%, or a gap of 1.32 percentage points. That’s slightly less than the 1.36 percentage point gap in the week ending April 21, which was the widest since 2014.
Adjustable-rate mortgages accounted for 10.8% of all mortgage applications in the week ending May 6. That’s up from 3.1% at the start of the year and the highest share since 2008, when a lack of MRA regulation contributed to the housing crash. . Dozens of borrowers were attracted to ARMs in the early 2000s because of their low initial “incentive rates” and the option of a 0% down payment. This became problematic when rates were reset and many buyers could no longer pay their monthly payments. Today, banks are doing more due diligence to check whether buyers will be able to cover the increased costs when the loan is reset. For example, Bay Equity Home Loans, Redfin’s mortgage company, requires a minimum down payment of 5%, a minimum credit score of 620, and a debt-to-income ratio of no more than 50%. There are also caps on how much lenders can raise interest rates.
Still, ARMs are risky because it’s hard to predict where mortgage rates will be when the loan resets. If they are significantly higher, it may be more difficult for borrowers to cover their monthly mortgage. For some types of ARMs, borrowers may face fees or penalties if they refinance or prepay their loan, explained Redfin deputy chief economist Taylor Marr. If borrowers are considering a refinance, they should calculate whether the closing costs of the refinance offset the savings to the ARM, Marr said.
“Adjustable rate mortgages can work very well for homebuyers who plan to stay in their home for less than 5-10 years and can afford to cover higher payments when the loan resets,” said Arnell Brady, Senior Loans Officer. Bay Equity Home Loans.
Brady said 20% to 30% of his clients now ask about variable rate mortgages, a significantly higher share than before the pandemic.
To view the full report, including charts and methodology, please visit: https%3A%2F%2Fwww.redfin.com%2Fnews%2Fadjustable-vs-fixed-rate-mortgages-2022
Redfin(www.redfin.com) is a technology-driven real estate company. We help people find a home with brokerage, instant home buying (iBuying), rental, loan, title insurance, and home improvement services. We sell houses for more money and charge half the fees. We also run the #1 real estate brokerage site in the country. Our homebuyer clients see homes first with on-demand viewings, and our loan and title services help them close quickly. Customers selling a home can receive an instant cash offer from Redfin or have our renovation team repair their home to sell for the best price. Our rental business helps millions of people across the country find apartments and houses to rent. Since launching in 2006, we’ve saved our clients over $1 billion in commissions. We serve more than 100 markets in the United States and Canada and employ more than 6,000 people.
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See the source version on businesswire.com: https://www.businesswire.com/news/home/20220520005068/en/