Adjustable Rate Mortgage programs (ARMs) lost some of their popularity during the housing market’s downturn as people moved to the security of fixed rate products. With the nation’s home appreciation rates steadily inching up, depressed inventories rapidly depleting, and renewed buyer confidence, it appears ARMs are making a comeback.
Adjustable rate mortgages are enticing for several reasons. They differ from traditional fixed rate mortgages because they have varying interest rates, which affect the amount of monthly payments. Their appeal lies in the fact that they typically begin with introductory rate periods that offer lower rates than those for fixed-rate loans. The beginning rate periods can be as little as one month or extend over 10 years.
Fixed Introductory Rate Period
The loans are typically referred to by their various introductory rate time frames, such as 3/1, 5/1 and 7/1 ARMs. The first number is the number of years that the rate will remain unchanged. Following that period, the rates typically fluctuate once per year.
Adjustable rate mortgages typically come with rate caps so borrowers are partially protected from payment shock associated with large increases in monthly mortgage debt obligations.
Now as favorable reports flood in from sources such as the National Association of Realtors, the National Association of Homebuilders, and the Mortgage Bankers Association, it seems that potential buyers are taking a new look at ARMs. With mortgage rates experiencing slight increases, savvy homebuyers with ARMs know they can likely refinance before introductory rate periods end. This is the ideal scenario for an ARM as long as borrowers help enough equity accrued to meet lenders’ loan-to-value (LTV) requirements. Borrowers with higher LTVs may be better served with the added security of a fixed rate solution.
More and more home buyers are flocking to the ARM loan option. A recent article in the New York Times by Marcelle Sussman Fischler, reported an interesting change that’s afoot. According to the Mortgage Bankers Association, this past July, 6.5 percent of all mortgage applications were for ARMs, compared to the same time one year ago, when that figure was 4.2 percent. MBA spokesman, Matthew J. Robinson acknowledged that the demand for this type of financing is expected to continue.
The following explanation of why ARMs are desirable was taken from the NYTimes article:
“For an adjustable-rate mortgage with a 5/1 term (with the rate fixed for the first five years) at 3.21 percent rather than a fixed 30-year jumbo mortgage at 4.69 percent, someone borrowing $750,000 could save $637.68 a month off the $3,885.28 payment. After 60 months, the borrower would have paid $54,565.92 less in interest, or $114,181.61 rather than $168,747.53.”
Taking out an adjustable rate mortgage carries a slightly higher risk, since your monthly mortgage payments could possibly increase after the initial fixed period is up. If you lost your job or another unforeseen issue arose, you could be placed into a financial bind once the introductory rate term is over. That’s why the ideal ARM loan borrower is someone who can afford to make higher payments if they need to. After all, life is pretty unpredictable, so you should make sure you have a backup plan just in case you’re faced with a rate increase or unexpected expense.
Although it is tough to predict what’s going to happen in the future, one thing is for sure – the difference in rates between a traditional fixed rate mortgage and an ARM can be considerable under certain market conditions. From Freddie Mac’s Primary Mortgage Market Survey for the week that ended Aug. 29th, a 30-year fixed-rate mortgage clocked in at around 4.51 percent, as opposed to a 5-year Treasury-indexed hybrid ARM, which averaged 3.24 percent. (Note, these rates have likely changed since this post was written. Contact eLEND today for the most accurate and up-to-date mortgage rate information).
Another phenomenon taking place these days is the temporary nature of most home buying strategies. John Aita, who is a retail sales supervisor for Wells Fargo Home Mortgage based in Melville, N.Y., noted in the NYT article that six years is the average length of time most borrowers keep one loan. According to Aita, after that, “Either they refinance or they move.” He also called ARMs a “fantastic deal” for growing families and young professionals. That’s because those categories of home buyers stand to either want or need larger homes, increase their income as they climb the corporate ladder, or both.
If you think an adjustable rate mortgage could be a good option for your home financing needs, please don’t hesitate to contact the ARM loan specialists at eLEND. Call (800) 634-8616 or submit your information electronically to receive free rate information.
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