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Do Adjustable-Rate Mortgages Make Sense Now?

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Adjustable-rate mortgages (ARMs) get bad press. The poster child for irresponsible borrowing, they’re the mortgage industry’s bad boys. But ARMs can be excellent loans for thrifty borrowers.

How ARMs work

An ARM begins with a low introductory rate that remains fixed for a specified period. Upon expiration, the interest rate periodically adjusts based on an underlying index, which goes up or down. This contrasts sharply with a fixed-rate mortgage (FRM), where the monthly payment remains consistent.

The chief advantage of an ARM is that it allows you to save money in the early years. However, it can become dangerous because historically, declining rates don’t last more than approximately five years. Therefore, payments on a 15- or 30-year ARM will generally increase over time. A plan to refinance when the introductory period ends is a terrific idea—if you can pull it off. But if you can’t, and are unable to make increased monthly payments, you may lose your home.

This unpredictability makes an ARM inherently riskier than its fixed-rate counterpart. With mortgage rates at 7.5% or less for 185 of the past 210 years, it’s a reasonable risk—except if you’re living through a period like the late 1970s and early 1980s, when interest rates hit 17%.
Is an ARM right for you today?
An ARM may be right if:

1. You plan to refinance or sell within five to seven years.

Since an ARM’s introductory interest rate is lower than its fixed-rate counterpart, you’ll save money during the loan’s first few years. The most common ARMs are 3/1, 5/1, and 7/1. The first digit indicates the number of years the introductory rate remains fixed; the second, the frequency of rate adjustments. (A 3/1 ARM has a fixed rate for three years, then adjusts annually.) If you pay off your loan, refinance, or sell before the introductory rate expires, an ARM makes sense.

Example: You borrow $300,000 to buy an investment property that you’ll fix up and resell within two years. Your options are either a 3/1 ARM that opens at 3.5% or an FRM that’s locked in at 5.5%. The ARM’s monthly payment during the first three years: $1,347.13; the FRM’s payment: $1,703.37. During the ARM’s introductory period, you’d save $356.24 monthly (about $4,275 annually). During the first two years, the aggregate savings would be about $8,550—a sizeable sum.

2. You want to pay as little as possible.

Money saved on a mortgage payment is money in your pocket. If you don’t want to pay any more than is absolutely necessary in the early years, you’re a good ARM candidate. You’ll generally save money over a 30-year fixed loan for the first seven or eight years.

3. You want to aggressively pay down your mortgage.

According to Dave Donhoff, a financial advisor at Leverage Planners in Kirkland, Wash., “An immediate ARM is good for a borrower who wants to get rid of his mortgage as quickly as possible. It’s risky because rates can change monthly, but since you’d be paying significantly less than with a fixed-rate loan, you could accumulate home equity faster by aggressively paying down your mortgage.”

Example: You have a 30-year FRM of $100,000 at 6%; the monthly payment is $500. An immediate ARM might be around 3%, or $200 per month, which is a 60% savings over the FRM. If you paid down your principal with that savings, you’d have $3,000 a year of accelerated equity accumulation.

Risk factors

Of course, it can be harder in practice. Suppose you plan to sell the property once the introductory rate expires. Your home’s value could plummet, and selling wouldn’t pay off your loan balance. Or the real estate market could stagnate, making it difficult to unload your home.

If you plan to refinance, a tight lending environment could make that challenging. If your home value drops, you may not have enough equity to refinance. Credit standards could change, making you a less-than-desirable borrower. Or rising interest rates could disqualify you for a new loan based on your monthly income and expenses.

Worst-case scenarios

These risks could derail your plans to pay off the mortgage, so evaluate what might happen after the ARM resets. Check its periodic cap; this is the maximum amount your mortgage rate can increase at each adjustment. If this cap is 2%, your 3/1 3.5% ARM could rise to 5.5% in year four, 7.5% in year five, and so on. In year five, your payment could rise to $2,023.57, which is $320.02 more than with a FRM. Assuming a rising ARM, you’d give back all your savings from earlier years in year seven.

These numbers could substantially differ depending on the periodic and lifetime caps associated with your specific ARM. A less aggressive mortgage with a lower periodic cap could take significantly longer to sour.

If your risk tolerance and flexibility levels are low, an FRM is a better loan for you. Ultimately, even though there can be cost savings with an ARM, you should choose the mortgage that gives you peace of mind in any market.

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7 Things Every Homeowner Should Know About the Aquapocalypse

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Over the next couple of decades more than 400 counties in the U.S. may be going through an extreme dry spell, according to a study by the Natural Resources Defense Council. How bad can it get?

You won’t be able to flush the toilet during daylight hours, take a shower longer than five minutes, or wash your dishes using fresh water. Parts of the Southern plains and Western states already are facing water restrictions.

Running your sprinkler will be forbidden — just like in water-scarce Sacramento where “water police” fine homeowners for illegal lawn watering.

And since water is vital to agricultural and energy production, drought also causes exorbitant grocery bills, soaring electricity rates, and killer gas prices.

Even chilling at home with a cold one can become a pricey luxury. Right now in parts of the country breweries are being asked to reduce their water use. Mandatory reductions may make beer as expensive as a prestigious champagne.

As our population increases and our water withdrawals grow higher, cities all over the country — including Atlanta, Cleveland, Salt Lake City, and Washington D.C. — may run bone-dry by mid-century, according to NOAA’s Cooperative Institute for Research in Environmental Sciences.

You CAN take action now to help future-proof your home against drought by eliminating your home’s worst water-hogging habits.

The worst water hog is landscaping. Our yards consume 30% of our home’s total water use — more than the household yearly average for washing clothes and showering combined. What’s the problem? Up to 50% of the water we use outside is wasted on over-watering our lawns.

First steps:

  • Give your sprinkler a break. Grass is not supposed to be bright green during the dog days of summer, according to the EPA. So water your lawn only when it’s truly thirsty. To check, step on your grass. If it doesn’t spring back, it’s time to water.
  • Let the grass grow. Longer grass reduces water evaporation, and /as a bonus you’ll have fewer weeds.
  • Give your sprinkler system a tuneup. Leaks and clogs can waste lots of water. A broken sprinkler head can pour 25,000 gallons of water down the drain over a six month period.

Big strides:

  • Water your lawn more efficiently with a Watersense-labeled irrigation controller. It’s like a programmable thermostat for your sprinkler system because it controls when and how much you water your lawn.

Giant leaps:

  • Hydro-zone your yard by grouping plants with similar watering needs in the same area. It make it easier to avoid over-watering
  • Landscape using parch-proof plants. It’s a great way to conserve water without sacrificing curb appeal.
  • Go with fake turf. It’s a low maintenance solution that never needs watering.

The second biggest water hog is the toilet. Up to 19% of your abode’s total water-use is flushed down the loo.

First step:

  • Check if your toilet is hemorrhaging water. Toilet leaks can waste up to 200 gallons of water daily (and that can total $840 per year!). To test for leaks put a few drops of food coloring in your toilet’s tank (but don’t flush) If the water in your bowl changes color within 15 minutes, it’s leaking.

Big stride:

  • Have an ancient commode? Upgrade to one with the Watersense label. They use 1.28 gallons per flush (gpf) or less compared to standard toilets made after 1992 that meet the federal standard of 1.6 gpf.

Giant leap:

  • Go with a composting potty. They require little to no water, and modern models are easy to use and look like regular toilets. They’re also a great solution to sanitation and environmental problems in unsewered, rural, and suburban areas.

The third biggest water guzzler is the clothes washer. It can account for as much as 15% of your household’s yearly total. A washer can also drive up your electricity bill from heating hot water to wringing clothes during the spin cycle. Here are three ways you can avoid getting hosed:

First step:

  • Check your washer’s settings. Don’t opt for second rinse cycle. If you have to wash a small load use the appropriate water level or load size selection.

Big stride:

  • Your standard washer is about to become an energy-sucking dinosaur. All basic front loaders will have to meet today’s Energy Star requirements by 2015, and top loaders by 2018. If you replace your washer with an Energy Star model, you’ll use around 35% less water and 20% less electricity.

    Giant leap:

  • Have a plumber re-route your washing machine’s greywater to trees and plants rather than the sewer line.

Showers and faucets round out the top five ways we consume water: Showers account for 12% and faucets account for 11% of our yearly use. Here are the top three ways you can cut back.

First step:

  • Wash like you’re in the Navy. To conserve water on naval ships, sailors would hop in the shower and quickly douse themselves in water, then turn off the water, get all sudsy, and turn back on the water to quickly rinse off. While a regular shower can use around 60 gallons of water, washing like a sailor can use as little as three gallons.

Big stride:

  • Replace your standard shower and bathroom faucet fixtures with ones marked Watersense. Doing so will shave 700 gallons off your faucet use and trim 2,900 gallons per year off shower use

Giant leap:

  • Stop running your faucet or shower while waiting for it to turn hot. A hot water recirculating system can save water and energy, according to Energy Star. Instead of sending cool water that’s been sitting in your home’s hot water pipes when a water fixture is turned on, the system sends the cool water back to the heater via the cold water line while sending hot water directly from the heater.

Bonus Fact: If you make water conservation improvements to your home now, you’ll not only save money on utility bills, your home will be more marketable and may even garner a higher price than less water efficient homes.

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Source: HousingWire

July shows the best price appreciation and inventory increases hit during the peak spring buying season in three years, according to data from Its data reveals homeowners are more optimistic about selling than in previous years. Jonathan Smoke, chief economist for, commented, “This year, we’re ending the traditional season with high buyer and seller confidence demonstrated by price appreciation, increases in inventory, and quick home sales.”
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