People often assume that because adjustable-rate mortgages "share risk" between mortgage lender and mortgage lendee, they will be rewarded with a lower mortgage rate than if they chose a comparable fixed-rate mortgage.The chart at right proves that thinking false.
Three separate times since mid-September, 5-year ARMs priced worse than a similar 30-year, fixed rate mortgage. It's not normal, but it does happen from time to time.
And it's also why locking mortgage rates is like running a Peyton Manning offense (for those of you who leave the room when a football game comes on, Peyton is a quarterback with the Indianapolis Colts) -- you can't call a play until you've stepped up to the line and studied what's on the other side of the ball.
Before settling on a specific mortgage plan, remember that mortgage markets change daily and mortgage rates change every 3 hours, 11 minutes. A 5-year ARM may look cheaper in the morning, but by the afternoon, it could be losing out to the 30-year fixed and -- all things being equal -- it's better to take that fixed-rate mortgage at a lower rate if it's available.
One of the things at work here is that, as humans, our brains are wired to shop for a product first, and then a price. For example, if you knew you wanted to buy a 32" HDTV within a certain budget, you may buy from Buy.com USA without even realizing that a 37" HDTV was on sale dirt cheap at the same store.
Calling that audible at the line of scrimmage is something your mortgage guy can help you with -- you're not expected to know what the "daily discounts" may be, or who's selling what for cheap. You could try to keep up, of course, it's just really tough to do -- even for us guys on the inside.
With professional assistance on your rate lock, there's a much better chance that you'll be in the right product at the right rate. The alternative is to pay more to your mortgage lender each month and nobody likes to do that.
