Today’s mortgage rates remain near historical lows and, with more than 6 million U.S. homes eligible to refinance, a mini-refinance boom is underway. Recently 30-year fixed rate mortgages currently average 4.04 percent nationwide with 15-year fixed rate mortgages averaging 3.20%. Even lower is the 5-year adjustable-rate mortgage (ARM), which now averages 2.93%. It’s an excellent time to shop for a loan or comparison shop your existing mortgage against today’s low rates.

 

Every week there are 100 mortgage consumers surveyed to find out the national mortgage rate. “Prime” borrowers are defined as those having a credit score of 740 of better, verifiable income with acceptable debt-to-income ratios, and a loan-to-value of eighty percent or lower. The most recent survey shows the average 30-year mortgage rate at 4.04% for borrowers willing to pay an accompanying 0.6 discount points. It also has the average 15-year mortgage rate at 3.20% for borrowers paying the same. Compared to recent history, these rates are remarkable.

 

30-year mortgage rate has averaged near 8.375 percent. Today’s rates are less than half of that. Banks require fewer discount points, too. In terms of dollars saved, the figures are huge. Historically, it has cost $375,000 to pay off a $100,000, 30-year mortgage. Today, that cost is $173,000. Today’s homeowners pay 54 percent less to own their homes as compared to the historical average. Unfortunately, mortgage rates won’t stay this low forever. When interest rates rise, so will the cost of homeownership.

 

Along with fixed-rate mortgage rates, adjustable-rate mortgage rates are near new lows, too. Recently we have seen the 5-year adjustable-rate mortgage at 2.93% nationwide with just 0.4 discount points required at closing. The 5-year ARM and its low rate can be enticing, but it’s important to understand how an adjustable-rate mortgage works before choosing one to finance your home.

 

Today’s ARM’s are governed by strict rules which determine by how much rates can change each year and, which place limits to how high your adjustable-rate mortgage rate can go in any given year. However, you’ll still want to know to what you’re agreeing to. For some fixed number of years, usually between three and ten, the mortgage rates for an ARM cannot change. With a 5-year ARM, this initial period is five years. With a 7-year ARM, the period is seven years. After the initial fixed number of years has passed, the ARM mortgage rate can change but only based on a pre-determined formula.

 

Most ARM’s are limited to interest rate changes of no more than 2% per year, save for their first annual adjustment. For example, at its first adjustment, a 5-year ARM is typically limited to a range of ±5 percentage points from the original “teaser” rate. Also, a 7-year ARM is typically limited to a range of ±6 percentage points. This first adjustment is the only time an ARM’s rate can move by such large amounts.

 

Beginning 12 months after the initial adjustment, and repeating every 12 months during the loan’s 30 years, ARM mortgage rates are subject to adjust again, but limited to just ±2 percentage points in either direction.

 

In other words, your mortgage rate can never move more than 2 percentage points in a year. In addition, your rate is “capped”. It can’t move infinitely higher. This is because “collars”, which are typically ±5% or ±6% from the loan’s starter rate, restrict ARM mortgage rates.

The “rules of the ARM” protect borrowers. Payments can’t climb at the discretion of the bank, nor can rates changes based on some arbitrary factor. ARM’s can only adjust according to prescribed rules.

 

Current mortgage rates are low. Fixed-rate mortgage rates are near four percent and adjustable-rate mortgage rates are in the 2s. It’s a good time to compare your mortgage options and see what you can save.

 

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