Vail Daily column: Adjustable rate mortgages becoming viable option again | VailDaily.com

Vail Daily column: Adjustable rate mortgages becoming viable option again

Adjustable rate mortgages are loans that do not have a fixed rate for their amortization full term and are starting to come back into the market. And with good reason.

Adjustable rate mortgages refer to loans that have a fixed rate for a certain portion of the loans' entire term. After this pre-determined 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 added to a margin or markup from the lender.

For example, a specific mortgage with an initial rate of 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 real estate investors to first-time homebuyers.

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. Adjustable rate mortgages were deemed the root of the demise to one degree or another.

Monumental changes

Since the financial meltdown in 2008, the mortgage industry has undergone monumental changes and corrections. There have been changes, improvements, regulations and lessons learned since this time. During this time, adjustable rate mortgages were more or less not a viable lending product or option. Slowly and surely, adjustable rate mortgages are starting to become more common in the marketplace.

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Qualification criteria for adjustable rate mortgages is now more scrutinized than it was in the early 2000s, making these loans more financially secure. The rate at which the borrower must qualify for the loan is often based off of a worst-case scenario and more reserves are required for qualification. More down payment or equity may be required from the borrower depending on the variables of the loan as whole.

For the right set of circumstances and the right borrowers, adjustable rate mortgages are still an advisable and savvy financing option. For starters, an adjustable rate mortgage is going to have an interest rate of nearly 1 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 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. Borrowers or buyers with shorter term plans for the home are really an advisable candidate for an adjustable rate mortgages. 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, or even those who plan on paying down the loan's balance at a rapid rate may in fact be better suited for an adjustable rate mortgage.

In an environment of potentially rising interest rates, adjustable rate mortgages do tend to get more consideration. Being lured into one for the monthly savings aspect is one of many variables that need to be considered. But if properly analyzed, an adjustable rate mortgage can be a savvy financial instrument. Guidance from a seasoned loan officer is required in making such a decision.

William A. DesPortes works for Central Rockies Mortgage Corp. He can be reached at 970-845-7000, ext. 103, and william@dsmortgage.org.