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Creating Affordable Payments (Part III)
3/1, 5/1, 7/1 and 10/1 ARMs 
In Part I we laid the foundation by briefly looking at 15 and 30 year loans. These traditional products offer safety, security, and in the case of the 15 year, save a pile of money. What they don’t do well is to create affordable payments.
In Part II, we examined the heavily promoted 40 and 50 year loans to see what they’re made of. It turns out they’re more sound bite than substance. They do little to help lower payments and they are far more costly in the long run.
So now let’s look at the “intermediate ARMs”, also sometimes called 3/27, 5/25, etc.
Normally we find lower rates in this category–sometimes as much as a full percentage point lower–and that can help. Let’s continue our comparison of monthly payments.
15 year loan, $300,000, 5.75% = $2491 mo
30 year loan, $300,000, 6.00% = $1798 mo
40 year loan, $300,000, 6.25% = $1703 mo
50 year loan, $300,000, 6.50% = $1691 mo
10/1 ARM, $300,000, 5.75% = $1751 mo
7/1 ARM, $300,000, 5.50% = $1703 mo
5/1 ARM, $300,000, 5.25% = $1657 mo
3/1 ARM, $300,000, 5.00% = $1610 mo
That’s a little better. But remember I said “normally”. Well, these are not normal times. Mortgage interest rates mirror yields of U.S. Treasury securities, and right now the short term yields are about the same as the long term yields. Translated to mortgage rates, the intermediate ARM rates don’t offer a rate different than the 30 year fixed. Even if you plan to be in the home a short time, these choices don’t help with payments. .
So, in our quest for mortgage programs to create affordable payments, we’ll look next at the much maligned Interest Only loans, and we’ll see why they’re not so bad. Got a question? Need help with a loan? Send me an email or call. I’m happy to help; it’s what I do.
December 29th, 2006 at 12:09 am
[...] In Part II of the Creating Affordable Payments series, we looked at 40 and 50 year loans to see if the advertising claims about lower were true, and we found that these loans do not really help, and the overall interest cost is much higher. In Part III , we looked at Intermediate ARMs to see if they were the answer to today’s most common challenge. Unfortunately, with the inverted yield curve in U.S. Treasury securities, the rate on a 5/1, 7/1, or 10/1 ARM is often higher today than the 30 year fixed. [...]
January 19th, 2007 at 8:42 am
[...] Okay, in our effort to create affordable payments, we laid a foundation with the 15 and 30 year fixed rate loans in Part I. We stretched the repayment term out to 40 and 50 year loans in Part II, and then looked at shorter term intermediate arms—the 3/1, 5/1 and 7/1–-in Part III. In Part IV, we looked at interest-only loans that eliminate the principal portion of payments entirely. [...]