Whereas adjustable rate mortgages (ARMs) have the advantage of low rates, fixed-rate mortgages stand out by the predictability of the monthly payments. The best features of both these types of loans are now combined in a unique type of loan available with a credit union from the Washington DC-area.
The Pentagon Federal Credit Union offers a 15/15 adjustable rate mortgage. It is a 30-year loan with a single rate adjustment – 15 years in. A unique type of loan product, this mortgage is available for both purchases and refinances up to $2 million.
The features of this 15/15 ARM could suit almost any borrower in the market, because it brings together the features of both major loan types, thus matching modern family lifestyle. The lender is confident about this new product which has been built on the experience and market success of the 5/5 ARM with 30-year amortization.
The initial rate advertised by Pen-Fed is 3.625% on the 15/15 ARM, whereas a 30-year FRM has an advertised rate of 4% and a 5/1 ARM a 3.00% rate. Nevertheless, the actual rates obtained by the borrower also depend on the credit score and other factors.
Increase capped at 6 points
The increase of the rate at the 15-year adjustment has been capped at 6%. Based on these numbers, in the worst-case scenario, the borrower will pay a 9.25% rate for the second part of the loan. However, chances are also for the rate to reset down, and the estimates could be encouraging given the current level of the base credit index. Calculated at today’s level, the rate would actually lower to 3.50%
As compared to other types of ARMs, the longer initial period of this mortgage product provides numerous benefits. The rate remains unchanged for 15 years, compared to other ARMs where the adjustment occurs after 5 or 7 years, and every year thereafter. There is less time pressure for borrowers; the locked-in rate allows more time for borrowers to move to a different home before the end of the 15-year period.
With a longer loan term, the rate increase will not have such a major impact on the borrower’s finances when the loan resets. The explanation lies in the reduced loan balance against which the new rate is to be assessed. At the rate mentioned above, 37% of the original loan balance will have been paid in 15 years, by normal amortization.
We could see other lenders interested in providing similar products in the future, although it’s hard to anticipate the market trend for such new loan types.
In order to qualify for this PenFed loan, the borrower should have some sort of government or military affiliation. Despite this apparent limitation, qualification is possible by joining some associations like the Voices for America’s Troops advocacy group or the National Military Family Association, which have military ties.