Weekly Market Recap

Are They Right For You?

As we approach the second half of 2011, one thing is becoming apparent in the mortgage market: adjustable rate mortgages are back.  After accounting for north of 50% of all mortgages issued during the boom period, ARMs vanished for a while, totaling just 3% of the market in 2009. Now they are increasing month over month on an origination basis, and Freddie Mac predicts they will make up 10+% of the market by December.  Behind the comeback is a simple fact: ARMs are a great bargain right now.  The most common ARM loan currently has a rate in the 3’s compared to high 4%/low 5% for a 30 year Fixed Rate mortgage.

"For anyone with a high likelihood of moving (or trading up in the future), the 5/1 is a great product," said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association. "It's a well understood product too; there's not a lot of danger with it."

So why isn't everyone grabbing an ARM?  Well, because Fixed Rate mortgages are seen as safer because they carry the same rate over the life of the loan.  Borrowers always know what their payment will be.  But with ARMs, interest rates change over time.  For example, for a 5/1 ARM, the most common ARM, take 3.5% as the start rate (in this example) for the first five years.  After that, the rate adjusts annually.  That sounds risky, but look deeper: on a $200,000 mortgage, the monthly ARM payment at 3.5% would be $898 compared with $1,074 for a 30-year, Fixed Rate loan at 5%.  That's a $10,560 savings after five years, when the ARM would then adjust.  At that point the ARM rate could jump to a worst case scenario 8.5% and the monthly payment to $1,538.  But at that point, it would still take more than 22 months of the higher ARM payments to offset the first five years of savings.

Still, many homebuyers want no part of ARMs.  Many buyers remember the so-called “toxic” ARMs and how their defaults triggered the mortgage meltdown.  But toxic structures are not the ARM types being originated today.  Those ARM’s of the past failed for a couple of reasons.  Many were issued to people who lacked the income to pay once the initial low fixed rates ended and the interest rate reset higher.  Additionally, the caliber of borrowers that were given these loans of yesteryear were very “subpar”, to say the least.

Today’s ARM products are entirely different animals. Unlike the toxic ARMs originated, these products are issued to borrowers with high credit scores making down payments, with their assets, debt, and income carefully underwritten before approval.

Need more help understanding ARM loans and if an ARM is right for you? Ask me…I am here to help!