FACT vs. FICTION: Risky Mortgage Loans

PITTSBURGH — As mortgage rates continue to climb, buying a house is getting more expensive every month.

That’s leaving many homebuyers looking at riskier options for financing— but could that backfire?

Mortgage Rates Rising

The American dream of owning a home is getting further out of reach for many folks here in southwestern Pennsylvania.

As of this writing, mortgage rates are about 7%, the highest in more than 20 years.

And that means it’s going to cost you more to buy a home.

For insight on ways to save money on your mortgage, we talked with the VP of Loan Originations for Howard Hanna in Pennsylvania, Peter Bauer.

QUESTION: Does it make sense to look at riskier options, like Adjustable Rate Mortgages, to get a lower rate?

BAUER: If you’re fully transparent about the risks that are involved and the different features of an adjustable rate versus the 30-year fixed, they can be a very good value proposition for the borrower that might not be buying their house of a lifetime.

FF ANSWER: So, yes, it is worth it to at least look at riskier options to see if they’re right for you.

What are the choices?

The most common *alternative to a 30-year fixed rate-- is an Adjustable Rate Mortgage or ARM, as it’s often called.

You’ll hear them referred to as a 5/1 ARM or sometimes a 7/1 ARM or 3/1 ARM.

The first number is the lower fixed rate they start with, for a set number of years.

The second number represents how often they adjust after that to the going market rate, usually every year.

This past month, the going rate for a 5/1 ARM has been about 5.5%. That was compared to about 7.25% for a 30-year fixed. That’s about 2% less, which can add up to a lot of savings in your monthly payment.

So, we ask:

QUESTION: Is an ARM worth the risk if you’re planning to be in a home for a shorter amount of time?

BAUER: If you’re if you’re a borrower that thinks that they’re going to be in the house for five to seven years, why would you buy a 30-year rate protection and a 30-year fixed? The savings over a five year period can be well worth it. Even if you end up staying for years six and seven on the 5/1 ARM, the average of all of those rates over that seven year period is likely less than the 30-year fixed— even if it does the full adjustments at the end.

FF ANSWER: So, yes, it can be worth it if you’re only planning to be in a home for a shorter time.

QUESTION: What about the average homebuyer?

BAUER: I’d say that the average consumer because the average is still 10 to 13. A 30-year fixed rate is probably still the right product. It’s very easy to understand.

So, no, Adjustable Rate Mortgages are probably not the best option for the average homebuyer. They leave you open to a lot more risk over time.

QUESTION: Given the potential savings, who do they make sense for?

BAUER: If you are in a transitional job, some jobs that move around— doctors, young doctors particularly. Young professionals tend to move neighborhoods as they get older, have children, have different careers. They really don’t stay for an extended period. Of time, particularly in your first house.

FF ANSWER: So, if you’re in the market to buy a home, it is something to consider.

BAUER: If the savings is great enough and you can sleep at night, it’s a great opportunity. If it’s going to bother you every day to think that my mortgage rate, at some point, can change in the future, it’s not the right product for you.

Only you know if the risk is worth it for you, but with the Federal Reserve expected to keep raising rates into next year, locking in a lower rate for a few years definitely makes sense for some.

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