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Adjustable-rate mortgages often beat 30-year fixed rates over time
A Redfin analysis says 71.6% of U.S. ARM borrowers have a chance to refinance within five years into a 30-year fixed rate at least 0.5 percentage points lower.
A Redfin analysis of Freddie Mac mortgage data going back through 1970 finds that, over the past half-century, homebuyers would have saved money by choosing an adjustable-rate mortgage rather than a 30-year fixed, about 70% of the time.
According to Redfin, 71.6% of U.S. homebuyers who take out an ARM have a chance to refinance into a 30-year fixed rate that is at least 0.5 percentage points lower than their original ARM rate within five years, in scenarios where prevailing mortgage rates drop by 0.5 percentage points.
Redfin also reports that 52.8% of ARM borrowers have the opportunity to refinance into a rate at least one full percentage point lower than the original rate, with more than half potentially lowering their monthly payments further through refinancing.
The analysis defines an “opportunity to refinance” when a borrower’s current rate is at least 50 basis points above the prevailing 30-year fixed rate, and also looks at a stricter threshold of 100 basis points above for a larger potential savings scenario.