What about an ARM? Adjustable Rate Mortgage, Benefits and Warnings

What about an ARM?  Adjustable Rate Mortgage, Benefits and Warnings.

In an earlier post I highlighted the difference between the high risk loans of a couple of years ago, the part they played in the housing and financial meltdown and the benefits of today's ARM products.  In this post I'd like to focus on the proper application of these products.  Anyone who doesn't understand all of the possible scenarios should not take out this type of loan.  If the language or terms are confusing or too complicated, please use a loan you understand and are comfortable with. 

Now, why would anyone seriously consider an Adjustable Rate Mortgage (ARM)?  ARMs generally come with a 5 or 7 year fixed rate and payment, after which both may adjust for the remaining term.  These are called 5/1 & 7/1 ARMs.  During the fixed period your rate and payment are set just as on a 30 year fixed mortgage.  If the borrower has strong reason to believe they will be moving within this initial period, these products should be seriously considered.  How seriously depends on how certain they are of the future change.  

Note rates currently as low as 3.5% for a 5/1 ARM translate into a significant monthly savings for the borrower.  They also translate into greater borrowing power, enabling the purchase of a more expensive home. 

Here is an example.  I posted a fantastic 30 year fixed rate today of 4.625% (4.757% APR).  On a purchase of $500,000 with 20% down your Principle & Interest Payment would be $2056.56.  The same scenario on a 5/1 ARM at 3.5% (3.583% APR) principle & interest payment would be $1790.22.  This would be a monthly savings of $266.31, or over 5 years a savings of $15,798.60. 

For someone who will be moving or making other changes in that time or even shortly thereafter, this product should be available and recommended.  Historically the average American moves every 7 years, or so I've been told.  Chances are people with no clear plans may also benefit, but with around 5% fixed rate money available, why take the chance. 

If you understand that after the fixed period ends your rate will likely increase substantially and you are reasonably certain that your housing needs will be changing at or near the fixed term of the loan, and you are comfortable with the risk/reward offset, then consider an ARM.  If not, you still have incredible rates available and should take full advantage of the historically low rates. 

As a lender, my only goal is to provide options to my clients and allow them to make the best decisions for their needs.  I receive no greater compensation for one product over another. 

What are your hesitations regarding an ARM?  What applications do you see for this product now that it is back on the market and priced attractively? 

 

Did you like this post?  Do you know someone else who might?  Do you know anyone who might benefit from our services?  Please pass this along to family or friends or contact us, we love to help.

Dan Tabit       206-310-8629    425-868-SOLD(7653)  DanTabit@Northstone.net

One stop Real Estate & Mortgage Services Serving Sammamish, Issaquah, Redmond, Bellevue, Mercer Island and the greater Seattle area.  

Comment balloon 8 commentsDan Tabit • February 05 2010 05:43PM

Comments

Hello Dan,

I see alot of difference the ARM rate between USA and Canada. Great detailed information, you information are useful for anyone.

Thanks

Posted by Ralna Burridge (The Mortgage Centre) over 10 years ago

Dan,

This is information that borrowers need to read and think about.  Your information is good and your questions relevant.   

Wonderful!

Posted by 1~Judi Barrett, BS Ed, Integrity Real Estate Services -IDABEL OK (Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745) over 10 years ago

ARM's are viable products when structured (as most are now) and used properly. It's a shame that so many people don't understand these products and how they can benefit them in specific situations.

Posted by Susan Thompson-Solomons, Southern MD Real Estate-Solomons Specialist (Berkshire Hathaway Home Services McNelis Group Properties) over 10 years ago

Hi Ralna, I have family in Canada and know your mortgages are different from what we offer in the States.  Thanks for the comment.

Hi Judy, I'm glad you find this useful.  Borrowers deserve to know their choices.  A happy borrower is a happy buyer!

Posted by Dan Tabit (Keller Williams Bellevue) over 10 years ago

Hi Susan, That's part of our job as lenders and .  ARMs set off all kinds of alarms because of misuse and misinformation.  Hopefully we can rehabilitate them for the appropriate situations.  

Posted by Dan Tabit (Keller Williams Bellevue) over 10 years ago

Dan: Thanks for the post. I always think it's worthwhile to listen and, if appropriate, present our clients with more than one choice. An ARM might make sense, especially if the homeowner doesn't plan on living there forever and wants a lower payment. Thanks again!

Posted by Paul McFadden, Pest Control, Seattle, WA. (Paratex) over 10 years ago

dan - I thought ARM's were dead. What do I know? Who is writing them in NC? Maybe I should call and investigate. Glad to know they are back because it is a viable method for some borrowers.

Posted by Claude Cross, Charlotte NC Homes For Sale (Homes By Cross, Inc. ) over 10 years ago

Hi Paul, If a client fits the profile, we'll discuss an ARM and make it available.  Some still want the security of a long term fixed rate and that's fine too.

Hi Claude.  I know Wells Fargo is one source that may be available in your area.  I'd ask around, an ARM may be a good tool to make available. 

Posted by Dan Tabit (Keller Williams Bellevue) over 10 years ago

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