Adjustable Rate vs. Fixed Rate

Mortgage rates have been climbing recently and if you are looking to buy a home or do a cash-out refinance, you are probably not feeling so great about seeing higher rates.  The simple truth is that life must go on – no matter what mortgage interest rates are at.  For all the reasons you want to stop renting and paying someone else’s mortgage, or getting rid of higher interest rate debt, those reasons don’t go away.  The smartest thing you can do is to learn strategies to mitigate higher rates now.

 

If your plan is to get out of the rental insanity, it is still a smart idea.  Regardless of where mortgage rates are at, these three truths remain:

 

1) Home prices will continue to rise.

2) The longer you wait the more you’ll miss out on appreciation.

3) The money you are paying in rent is going into someone else’s pocket.

 

If you have a ton of consumer debt like credit cards at rates probably above 20% interest, it still makes sense to consolidate that debt into a new loan in the 6% range.

 

The only real question is how to obtain the best financing (lowest rate) for your situation.  Sadly, most people automatically think they must obtain a 30-Year Fixed rate loan.  The 30-Year Fixed is the most popular loan product out there.  So popular that for years I had the license plate 30YRFXD – figuring that most people would know what it meant.

 

In reality the 30-Year Fixed rate mortgage is not the best option for most people.  Why?  The consumer is paying a premium to have a guaranteed rate for all 30 years of the loan.  But in reality, no one ever keeps a 30-Year mortgage for 30 Years.  Young couples starting out may only be in their starter home for 5-7 years before they sell to find the next home on their journey.  Military here in Hawaii for their 3-Year rotation certainly won’t need 30 years of rate protection either.  And in many other cases the mortgage they get today will not be in place 10 years from now.  Probably the most important reason today to skip the 30-Year Fixed rate product is inflated rates.

 

For all these reasons the consumer can save a good chunk of money by getting an adjustable-rate mortgage.  ARM’s offer an initial lower rate for the first few years before they adjust to true market rates.  You don’t get an ARM to keep for 30 years.  You get an ARM to save money during the fixed rate portion of the loan.

 

Fixed rate portion?  I thought it was an adjustable rate?

 

Almost all Adjustable-Rate Mortgages have an initial period where the rate is fixed for the first 3, 5, 7, or 10 years.  After that fixed period, the rate will adjust, usually every 6 months.  You get to decide how long you want your rate guaranteed for.  All ARM’s have a cap on how much the rate can change after the initial fixed period, and a cap on how high they can go over the life of the loan.

 

How much can you save?  A quick check this week showed the 5-Year ARM rates are roughly 5/8% lower than a comparable 30-Year Fixed rate mortgage.  For $600,000, here’s the difference in payments between the two:

 

30-Year Fixed at 6.375% (6.473% APR) has a monthly principal & interest payment of $3,743

 

5-Year ARM at 5.750% (6.266% APR) has a monthly principal & interest payment of $3,501

 

You’ll save $243 per month.  Over the 5-year period you’ll save $14,580.  At the end of the 5-year period your mortgage balance will be the same for either loan program.

 

The best part is that 45 days prior to any rate change on the ARM product you’ll get a notification of what your new rate will be for the next period.  If the rate is higher than prevailing rates, refinance – and most likely into another ARM with a lower initial rate.

 

When times are tough the smart people put smart strategies in place to maximize their money.  You should be one of the smart people.  If you have questions on whether and ARM makes sense for you, feel free to reach out using my email address and phone number above.

 

 

 

 

And now the week’s economic news…….

 

Massive Job Gains

Mortgage rates continued to be heavily influenced by movements in oil prices this week.  In addition, stronger than expected labor market data was great news for the economy but unfavorable for mortgage markets.  As a result, rates ended the week higher.

 

The biggest market-moving event was the May Employment report, which showed that the economy added a massive 172,000 jobs in May, well above the consensus forecast for a gain of 85,000.  In addition, revisions added 93,000 jobs to the results for prior months.  Hiring was strong in leisure and hospitality, local government, and healthcare.

 

Wage growth remained moderate, with average hourly earnings increasing 0.3% for the month, in line with forecasts.  On an annual basis, wages rose 3.4%, down from 3.6% the previous month and marking the slowest pace of growth since May 2021.  This is below the current inflation rate.  The unemployment rate was unchanged at 4.3%, as expected.

 

The latest JOLTS (job openings and labor turnover rates) report, covering the month of April, was unexpectedly strong.  At the end of April, there were 7.6 million job openings, far above the consensus forecast of 6.9 million and the most since May 2024.  More openings suggest that companies face greater pressure to raise wages to hire enough workers, signaling strength in the labor market.  This makes Fed officials more reluctant to loosen monetary policy by lowering the federal funds rate.

 

Two other significant economic reports from the Institute of Supply Management also exceeded expectations.  The ISM national services sector index rose to 54.5, while the ISM national manufacturing sector index climbed to 54.0, the highest level since May 2022.  Readings above 50 indicate an expansion in the sectors.  While tariff policies have been in flux since the Supreme Court decision in February, the higher tariffs on foreign goods put in place last year may be helping domestic manufacturing companies close the performance gap with service firms over the last few years.

 

 

 

Next Week

Looking ahead, attention will remain fixed on the conflict in the Middle East.  Investors also will monitor comments from Fed officials about future monetary policy.  For economic data, Existing Home Sales will come out on Tuesday.  The Consumer Price Index (CPI), a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services, will be released on Wednesday.  The Producer Price Index (PPI), another monthly inflation indicator, will come out on Thursday.

 

Until next week….

 

*** Please note that Freddie Mac publishes their weekly rate report on Wednesday mornings from data received Monday and Tuesday. 

The graph above is intended to shown rate trends, and not “today’s current rate”. ***

 

 

Reviews From Our Past Clients

With every client, we promise to provide you with a comprehensive analysis of your mortgage needs, the best service possible, and the best rates we can find.  We make it our mission to have every transaction close with our clients happy with the service we provided.  Browse through the hundreds of reviews we’ve received from our clients posted on both Google and Zillow.com, and read what they thought of their experience using Hawaii Mortgage Company.

 

 

Google Link:

Hawaii Mortgage Company Review on Google.com

 

 

Zillow.com Link:

Hawaii Mortgage Company Reviews on Zillow.com

 

 

 

Our Rate Quote System is Available to You

Our automated rate quoting system is live.  Now you can check rates and try different scenarios 24-hours a day.  Remember, it’s just a computer.  For non-standard rate quotes, such as construction, vacant land, and other specialty programs, you’ll still need to give a call.

 

Here’s the link:      https://www.hawaiimortgage.net/todays-rates/

 

 

Do you think all lenders are the same?

There is a difference when you use Hawaii Mortgage Company for your financing.  Here’s a short video telling you why:

 

https://youtu.be/c7AKQ5wa2_U

 

 

 

Broker vs. Banker?

Click the link below to get a quick lesson on why working with a Mortgage Broker will benefit you on your next transaction.

 

https://youtu.be/iH3igW5v2jE