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With Rates On The Rise Home Buyers Should Consider An Arm

The rapid escalation of mortgage interest rates over the past few months has left thousands of young Chicago home buyers wondering if they ever will experience the American Dream of homeownership.

On September 8th, Freddie Mac’s Primary Mortgage Market Survey reported that benchmark 30-year-fixed home loans nationwide rose to an average of 5.89%, up from 5.66%, and only an eyelash away from the lofty 6% level. A year ago, a 30-year-fixed loan averaged only 2.88%.

However, there is another road to homeownership—the affordable adjustable-rate mortgage (ARM).

Freddie Mac also reported on September 8th that borrowers who choose a 5-year Treasury-indexed hybrid ARM could lock in a mortgage with an average interest rate of only 4.64%. That’s a hefty savings of 1.25%, cutting hundreds of dollars off of the monthly payment.

“Home buyers navigating the current environment are coping in a variety of ways, including switching to adjustable-rate mortgages,” noted Sam Khater, Freddie Mac’s chief economist.

An ARM typically starts with a fixed interest rate for a set period of time, and then adjusts at intervals. ARMs come in different options in which the interest rate is set for three, five, seven or 10 years.

After the initial fixed-rate period, the rate can adjust in six-month or 12-month intervals depending on market conditions. The adjustments are based on an index, such as Treasury yields, and the lender’s profit margin also is tacked on.

If a home buyer takes out a five-year ARM, the interest rate is locked for that initial period. After five years, the rate can adjust with the index rate every year thereafter.

ARMs are a roll of the dice. Consumer advocates say borrowers should worry that interest rates may go up over time, and that would mean payments could increase, or negative amortization could occur, causing the loan balance to grow. However, rates also can go down over time. At that time, it might be a good idea to refinance and lock in a fixed-rate loan.

Experts say that if you are likely to move in five to seven years, and the residence you are looking to buy won’t be your “forever home,” an ARM may make a lot of sense.

“Not only are mortgage rates rising, but the dispersion of rates also has increased, meaning that borrowers can benefit from shopping around for a better rate,” Khater advised. “Our research indicates that borrowers could save an average of $1,500 over the life of a loan by getting one additional rate quote and an average of about $3,000 if they get five quotes.”

On September 9th, Guaranteed Rate was quoting 4.875% on a seven-year adjustable-rate mortgage with 20% down payment. “A borrower with a 740 FICO score could qualify for a loan amount of $400,000 on a single-family home,” said Jeremy Rose, mortgage broker at Chicago-based Guaranteed Rate.

Affordable fixed loans available

Chicago-area borrowers who move quickly still have a faint chance to lock in the following bargain rates as of September 9th, reports

  • Mutual of Omaha was quoting 4.933% on 30-year loans with a 20% down payment and 4.375% on 15-year mortgages with a 5% down payment. Borrowers also will pay a $850 loan fee, plus points, or 0.25% of the loan amount.

  • First Savings Bank of Hegewisch was quoting 5.105% on 30-year loans and 4.450% on 15-year mortgages with 20% down payment and a $615 loan fee.

For more housing news, visit Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit


“The book is Escaping Condo Jail by Sara Benson and Don DeBat. I would say that anybody thinking about buying a condo, or even anybody serving on a condo board, or anybody who has any connection to a condo, this is must reading—all 600 and something pages. Thanks a lot for a great book!”


Steve Sanders, “Your Money Matters” WGN TV, December 22, 2014

By Don DeBat

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