30 Year Fixed vs. 5 Year Hybrid ARM
With fixed rates plunging to record lows, the vast majority of borrowers are choosing the 30 or 15 year fixed rate mortgage. However, in some circumstances, a 5 year ARM, or Hybrid mortgage is a wiser choice. Particularly with FHA loans, the 5 year product is very attractive. The difference between a 30 year fixed rate and a 5 year hybrid ARM, is that the rate on the ARM product starts out at a reduced rate for the first 5 years. Then it can rise as much as 1% per year in the subsequent years. The maximum rise over the entire loan is 5%.
The current FHA 30 year fixed rate mortgage is 4.75%. The 5 year ARM is at 3.25%. So, using a $100,000 loan amount for example, the payment deferential is as follows:
$100,000 at 3.25% = $435.21 per month
$100,000 at 4.75% = $521.62 per month
Net difference of $86.41 per $100,000 financed per month
The 5 year ARM can go up after 5 years. So, using worst case estimates, the payment can rise to $491.94 in year 6, $552.21 in year 7, $615.72 in year 8, $682.18 in year 9, and $751.27 in year 10. It is not until the 10th year that the sum of the ARM payments meets the sum of the fixed rate payments.
With fixed rates plunging to record lows, the vast majority of borrowers are choosing the 30 or 15 year fixed rate mortgage. However, in some circumstances, a 5 year ARM, or Hybrid mortgage is a wiser choice. Particularly with FHA loans, the 5 year product is very attractive. The difference between a 30 year fixed rate and a 5 year hybrid ARM, is that the rate on the ARM product starts out at a reduced rate for the first 5 years. Then it can rise as much as 1% per year in the subsequent years. The maximum rise over the entire loan is 5%.
The current FHA 30 year fixed rate mortgage is 4.75%. The 5 year ARM is at 3.25%. So, using a $100,000 loan amount for example, the payment deferential is as follows:
$100,000 at 3.25% = $435.21 per month
$100,000 at 4.75% = $521.62 per month
Net difference of $86.41 per $100,000 financed per month
The 5 year ARM can go up after 5 years. So, using worst case estimates, the payment can rise to $491.94 in year 6, $552.21 in year 7, $615.72 in year 8, $682.18 in year 9, and $751.27 in year 10. It is not until the 10th year that the sum of the ARM payments meets the sum of the fixed rate payments.
Hybrid ARMs are not for everyone, but for a home buyer that expects to sell or refinance within 5 to 10 years, this is a financing option worth considering.
I would be happy to run your custom scenario so determine the best solution to your financing needs.
Below is a graph illustrating the payments:
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