Financial Face-Off: Adjustable-rate mortgage vs. fixed-rate mortgage: ‘It’s amazing what people don’t know about mortgages’

by | Jul 20, 2022 | Stock Market

Hello and welcome to Financial Face-off, a MarketWatch column where we help you weigh financial decisions. Our columnist will give her verdict. Tell us whether you think she’s right in the comments. And please share your suggestions for future Financial Face-off columns.  The face-off  It’s tough out there for homebuyers. The median U.S. home price just broke the $400,000 mark for the first time ever (it’s at $407,600 to be exact, up 14.8% from a year ago, according to the latest figures). On top of that, the cost of a 30-year fixed rate mortgage has gotten much pricier too, with rates soaring to 5.51%, up from 2.88% a year ago.

Though there are signs the real estate market is cooling, in competitive housing markets all-cash offers and bidding wars were common until recently. Buyers are under pressure and they’re making all kinds of concessions to get into houses, including skipping home inspections and waiving other contingencies. Taking out an adjustable-rate mortgage is one strategy buyers have been turning to in an attempt to (temporarily) lower their monthly housing payment. It’s becoming more common especially in expensive housing markets such as San Francisco and San Jose, Calif, and Bridgeport, Conn., according to CoreLogic. Adjustable-rate mortgages typically start out with a lower-than-average interest rate, and then “adjust” to a higher or lower rate (depending on where fluctuating, market-determined interest rates stand when the adjustment happens, and other factors) after a set period of time. A 5/1 adjustable-rate mortgage (ARM), for example, changes its interest rate once a year after five years. Borrowers sometimes take out an adjustable-rate mortgage if they think they’ll be selling the house before the rate adjusts. ARMs can be attractive because borrowers will initially have a lower monthly mort …

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