The rich are different … at least when it comes to getting a mortgage. When data firm CoreLogic examined 230 “super-jumbo” mortgages — between $10 million and $20 million — originated since 2013, they found that most were adjustable-rate mortgages, or ARMs.
By contrast, just a small portion of conventional loans taken since that time are adjustable. That’s smart, because although the rest of us could benefit from the lower initial rate on adjustable loans, we may not be prepared if the initial low-rate period adjusts up to a higher rate.
Indeed, it’s not just those “one-percenters” taking super-jumbo loans, but the merely wealthy who also favor jumbo mortgages, which are defined as over $484,350 in most of the U.S. For one thing, the bigger the mortgage, the more a borrower saves with a lower rate charge.
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So why shouldn’t a conventional borrower seeking, say, a $200,000 loan take an ARM, which early in 2019 might be offered at about 4.06 percent for the first seven years, rather than 4.45 percent for a fixed rate throughout the 30-year mortgage term?
Well, some middle-income borrowers can consider an ARM, but they should “anticipate their income to remain stable, or plan on moving (before the rate adjusts),” Terri Munro, partner with BT Wealth Management, LLC, advises.
Also, if you have the savings, make extra payments periodically to whittle down the loan balance so that if the rate later jumps up, the interest charge is figured on a lower balance, adds Elijah Kovar, co-founder of Great Waters Financial.
Since fixed-rate loans have been historically low for several years, bottoming to slightly more than 3 percent in 2012, and averaging in the 4 percent range since, most borrowers find it’s not worth the risk to take an ARM.