Adjustable rate mortgages starting to re-enter market
June 1, 2013
Adjustable rate mortgages. ARMs. Hybrid loans. However or whatever you want to call them, loans that do not have a fixed rate for their full term are starting to come back in to the market place, and with good reason I might add.
By an adjustable rate mortgage, I am referring to loans that have a fixed rate for a certain period or portion of the loans' whole term. After this predetermined period of time has elapsed, the loan will begin to adjust for the remainder of the term. In most instances, the loan will adjust one time per year based upon a current market index (IE the LIBOR Index or US Treasury Index) added to a margin or markup from the lender. A 5/1 LIBOR ARM with an initial rate of say 2.75 percent and a 30 year amortization means that the initial rate of 2.75 percent is fixed for five years. If the loan is held or kept by the borrower from years six through 30, then the rate will adjust one time per year. In most cases, the loan will be paid off in full after the 30 year term. During the early 2000s, adjustable rate mortgages seemed to be the preferred loan of choice from savvy and experienced real estate investors to first time home-buyers.
Then the subprime mortgage meltdown in 2008 occurred and everything changed. Financial institutions that were a mainstay on Wall Street went bankrupt. Stock markets tumbled. Faulty or worthless mortgage-backed securities and adjustable rate mortgages were deemed the root of the demise to one degree or another. I am not going to say that the mortgage and housing industries have come full circle to where they were in the early 2000s, but as whole there have been changes, improvements, regulations and lessons learned to both industries since this time.
For the right set of circumstances and the right borrowers, ARMs are still an advisable and savvy financing option. For starters, an adjustable rate mortgage is going to have an interest rate of roughly one full percentage point less than a loan with a fixed rate term such as a 30-year fixed rate mortgage. This is a general but applicable statement more or less across the board between hybrid loans and fixed rate loans. One full percentage point less on the interest rate can often mean hundreds of dollars less per month on the principal and interest payment. I doubt any of us would have trouble determining what to do with an extra few hundred dollars per month, but paying down debt or padding 401(k) retirement accounts are two uses that spring to mind.
Borrowers or buyers with shorter-term plans for the home are really a more advisable candidate for an ARM. Many of us who own homes in the valley today own them because we were able to buy and sell once or twice over. As the real estate market and the economy as a whole continue to improve, this is becoming more likely for many homeowners once again. A buyer's plan for the home is a case-by-case scenario and dependent upon many variables. Nonetheless, those who do not plan to be in a home more than a few years may in fact be better suited for an adjustable rate mortgage.
During the past couple of weeks, mortgage rates have risen a bit off their historical low levels due to multiple factors. As we move in to 2014, all indications are that rates should in fact keep rising. In an environment of rising interest rates, adjustable rate mortgages do tend to get more consideration. Being lured in to an ARM for the monthly savings aspect is one of many variables that need to be considered. But if properly analyzed and fully understood, an adjustable rate mortgage can be a savvy financial instrument. Guidance from a seasoned loan officer is required in making such a decision as the product itself can be complex and many factors need consideration.
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William A. DesPortes, of Central Rockies Mortgage Corp., can be reached at 970-845-7000, ext. 103, and firstname.lastname@example.org.