At current interest rates, adjustable-rate mortgages offer "substantially higher savings" to borrowers, a recent analysis from LendingTree found.
The company said from January to May, the proportion of borrowers who refinance into a 30-year fixed-rate mortgage has increased by 5% on a year-over-year basis. For purchase loans, this is 6%.
Compared to the same time frame in 2011, there has been a 12% decline in the popularity of 5/1 ARMs, which LendingTree attributes to borrowers becoming less risk-adverse.
But, the company continued, that 5/1 ARM, even in the worst-case scenario, in the first 93 months (when the break even point versus the 30-year FRM is reached) of a mortgage loan is a better option for borrowers.
Virtually of those savings, however, will occur in the first five years, after that period, the borrower will have saved $9,338 in total on a $225,000 loan. The borrowers can also reduce their principal balance by an extra $4,000 during this time.
Doug Lebda, LendingTree CEO, said, "What's surprising is the amount of savings these borrowers are missing out on. The average household could save well over $130 per month and pay more towards the principal balance by choosing an adjustable-rate loan, even when we factor in today's historically low fixed interest rates. Ultimately, deciding if an ARM or a fixed rate is more beneficial will depend on how long the borrower intends to stay in the house without refinancing."
