Adjustable rate mortgages, ARMs for short, are back in the
news at the New York Times. The Times loves to tout ARMs as risky, but it’s
never quite clear who is bearing the risk—the borrower or the investor.
Because adjustable-rate loans carry more risk, rates on them
are lower than those on fixed-rate loans. After an initial period of fixed
interest, rates may rise — though such loans also come with a lifetime cap that
limits ups and downs.
The “risk” to the borrower is, of course, that rates may
rise. But the pain of that risk is the
built-in caps on increase in most ARM loans. For instance, the commonly used 1 year Fannie
Mae note provides for a cap on each adjustment AND a maximum interest rate over
the life of the loan. These provisions
are designed to avoid the so-called “interest rate shock” that elected
politicians love to speak about.
In any event, is an ARM good for you? Speak to a qualified mortgage loan officer to
find out. And, importantly, compare the
numbers.
Here’s the full article:
The New York Times
August
29, 2013
Risks Aside, ARMs Gain Ground
By Marcelle Sussman Fischler
With mortgage rates inching up and homeowners often
refinancing before the end of their loan terms, adjustable-rate mortgages are
becoming more enticing to more borrowers.
In July, for example, 6.5 percent of mortgage applications
nationwide were for adjustable-rate loans, while a year ago, the percentage was
4.2, according to the Mortgage Bankers Association, which expects demand to
continue. “We expect ARMs to increase,” said Matthew J. Robinson, a spokesman.
Because adjustable-rate loans carry more risk, rates on them
are lower than those on fixed-rate loans. After an initial period of fixed
interest, rates may rise — though such loans also come with a lifetime cap that
limits ups and downs.
For some borrowers, the initial savings may be worth the
risk. By taking 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, enough to “lease a nice car or more,” Keith
Gumbinger, the vice president of the financial publisher HSH.com, said in an e-mail.
After 60 months, the borrower would have paid $54,565.92
less in interest, or $114,181.61 rather than $168,747.53. Kept in a piggy bank,
it would be “enough to put your kid through at least one year of a good college,”
Mr. Gumbinger added.
The potential hitch is that borrower may need to refinance
or sell the home before the fixed portion of the loan ends — or possibly “be
exposed to significantly higher interest rates and monthly payments,” Mr. Gumbinger
said, “which could wipe out the savings pretty quickly, not to mention causing
you budgetary duress.”
According to Freddie Mac’s Primary Mortgage Market Survey, for
the week ended Aug. 29, a 30-year fixed-rate mortgage averaged 4.51 percent, while
a five-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.24
percent.
John Aita, a retail sales supervisor for Wells Fargo Home
Mortgage in Melville, N.Y., says fewer borrowers these days seem
likely to get stuck with a higher rate when the fixed portion of the ARM
expires. “People never keep the loans that long anymore,” he said, citing six
years as the average. “Either they refinance or they move.”
For first-time buyers who plan to move up to larger quarters
as their families grow, or for young professionals whose income will rise in a
few years, adjustable-rate mortgages are “a fantastic deal,” Mr. Aita said.
“If you are planning to use the house as a steppingstone and
not going to stay 30 years,” he said, “take the adjustable.”
Those planning to downsize after their children go off to
college can also benefit.
Six months ago, Beth Zucker, a single mother from Bucks County, Pa.,
whose twins are 13, refinanced from a 7/1 ARM to a 10/1 interest-only ARM at 3
percent.
She’s not worried about where interest rates will be when
the rate adjusts in a decade. “When my twins go off to college,” said Ms. Zucker,
who is a financial adviser, “I’m going to sell the house and downsize.”
The most common adjustable-rate mortgages are designated 3/1,
5/1, and 7/1, according to freddiemac.com.
A 3/1 ARM has a fixed interest rate for the first three
years. After that, the rate can change annually. A similar rule applies for a 5/1
and 7/1 ARM. If the rates increase, monthly payments increase. And if rates dip,
payments may not decrease, depending upon the initial interest rate. Typically,
an adjustment “cap” limits how much the interest rate can jump or fall at each
adjustment period.
For your next commercial real estate transaction, house purchase, mortgage refinance, reverse mortgage, or home equity loan, contact us. We can help. Located in Fairfield, NJ, we are the title insurance agent that does it all for you.
For your next title order or
if you have questions about what you see here, contact
Stephen M. Flatow, Esq.
Vested Land Services LLC
165 Passaic Avenue, Suite 101
Fairfield, NJ 07004
Tel 973-808-6130 - Fax 973-227-0645
E-mail sflatow AT vested.com
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