There Is A 1.03% Interest Rate Spread Between Adjustable Rate Mortgages And Fixed Rate Mortgages

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It's a common question with rate shoppers. Which is better? A fixed rate mortgage or an adjustable rate mortgage? In short, it depends. And the chart at top shows why.

ARMs And Fixed Rates Don't Move In Unison

Mortgage rates are based on the price of mortgage-backed bonds, a group of securities bought and sold on Wall Street. When bonds are in demand, mortgage rates fall and when bonds are out of demand, mortgage rates rise.

The logic applies to most conventional mortgages. However, within the class of "conventional" mortgages, there are a multitude of products including:

• 30-year fixed rate mortgage
• 15-year fixed rate mortgage
• 5-year ARM
• 7-year ARM
• 10-year ARM

On any given day, the rate of each individual mortgage type is based on whether markets are going up or down, plus additional risk factors tied to the specific loan traits.

For example, a 30-year fixed rate mortgage has a great exposure to inflation than does a 5-year ARM. As such, 30-year mortgage rates tend to be priced higher than comparable 5-year ARMs.

The 5-Year ARM Keeps Getting Better

Each week, government-backed Freddie Mac publishes a weekly mortgage rate average compiled from 125 banks across the country. Based on this week's survey results, home buyers in Cincinnati would be silly to not at least consider the 5-year ARM.

As compared to the 30-year fixed, the 5-year ARM is an absolute steal.

Consider this comparison:

• In May 2009, 5-year ARMs were better by 0.04 percent
• In May 2010, 5-year ARMs are better by 1.03 percent

On a $250,000 home loan, the ARM saves $153 per month on mortgage payments. Plus, the amount of monthly principal repayment is higher, too. You'll pay down your loan faster.

Who Is A Good Fit For The 5-Year ARM?

Adjustable-rate mortgages aren't perfect for everyone, but given your circumstance, they could be a fit. If you meet any of the following criteria, it would be silly to not at least look at today's 5-year ARM pricing:

1. You're buying a home and don't intend to live there for long
2. You're planning on moving in the next few years and your mortgage rate is higher than 4.625%
3. You're currently using an ARM and want to "restart" your initial fixed rate period

Heck, with rates this low, people with soon-to-adjust mortgages may want to take "the sure thing"; lock in at today's rates and forget about what rates might do in the future. It's one less stress in your life.

However, before taking a new ARM, make sure speak with your loan officer about how adjustable-rate mortgages work, and what the longer-term risks may be for your individual situation. The savings may be tempting, but there's more to consider than just the payment.

How To Apply For A 5-Year ARM At 3.375 Percent

To inquire about a 5-year ARM, call my office at 513-443-2020 or. We can review your situation personally.  If the ARM isn't too risky given your goals, we can then take a formal application and start working toward closing.

Most ARMs are closing in 3 weeks.