Many people will tell you that an Adjustable Rate Mortgage (ARM) is horrible, and something a borrower should never take out. A friend recently stopped by worried that his ARM was adjusting and that his payment would go through the roof. We analyzed his paperwork and found out that his interest rate would be going down by MORE THAN 2 PERCENT! This made a big impact on his payment!
Had super short introductory periods like two years or less
Had a pre-payment penalty that was in force longer than the first adjustment of the loan
Had a payment that didn’t even cover their interest
These loans were definitely toxic.
The difference between today’s ARM’s? Today’s ARM’s are much safer and better loans. If you think you are only going to be in a property for 5, 7 or 10 years, you can find an ARM that has a fixed rate time frame that matches! Here are features to look for in an ARM:
A fixed rate period that is the same or longer than the time frame you are planning on staying in the house. If you think you’ll be there for five years, get a 5 year fixed ARM, or a 7 year fixed ARM.
Caps or limits to how high the interest rate a go to both at each adjustment and for the life of the loan.
Low margins. What’s a margin? Essentially, it’s the lenders “mark up” over the cost of their funds. The lower the margin, the lower your future interest rate.
Most importantly, a lower rate than a 30 year fixed rate loan. If you are sharing the interest rate risk with the lender, you should get a break in your costs.
Recent customers of mine who are moving to a new town for just five years, will be saving over 1% in interest rate compared to the thirty year fixed rate loan. For them this means about $100 per month! For $100 a month, they can buy their loan officer a steak dinner every month for getting them such a good deal!
Don’t be fooled by so-called experts. ARMS are a great deal IF MATCHED to the correct situation. Thirty year fixed rate loans are great, but sometimes an ARM is a better option.
“Purchase application volume jumped last week largely due to another sharp increase in applications for government loans. Borrowers were likely motivated to apply for loans before the scheduled increase in FHA insurance premiums,” said Michael Fratantoni, MBA’s Vice President of Research and Economics, in a release.
“Refinance activity increased somewhat, as rates dropped to their lowest level in a month towards the end of the week.”
That pushed the refinance share of mortgage activity to 58.5 percent of total applications from 60.3 percent a week earlier.
So it looks as if purchases will eclipse refinances in the near future, which is good news for the flagging housing market.
Meanwhile, the popular 30-year fixed-rate mortgage dipped to 4.83 percent from 4.98 percent, keeping the hope of refinancing alive for more borrowers.
The 15-year fixed averaged 4.07 percent, down from 4.17 percent a week earlier, meaning mortgage rates are still very, very low historically.
That alone could bring more buyers to the signing table this summer.
Borrowing costs on home loans continue to increase, with mortgage rates rising sharply for the past five weeks in a row. New data released Thursday show that the average rate for a 30-year mortgage jumped 22 basis points over the last seven days. Freddie Mac reports that rates for a 30-year fixed mortgage averaged 4.83 percent (0.7 point) for the week ending December 16, 2010. That’s up from last week’s average of 4.61 percent. Last year at this time, the 30-year rate was 4.94 percent.
The GSE’s weekly rate survey is based on data gathered from about 125 lenders across the country, and it showed increases across the board.
The 15-year fixed-rate mortgage this week averaged 4.17 percent (0.7 point) in Freddie’s study. Last week, it was 3.96 percent, and a year ago at this time, it was 4.38 percent.
Adjustable-rate mortgages (ARMs) also climbed higher. Freddie says the 5-year ARM averaged 3.77 percent (0.7 point) this week, up from 3.60 percent. Rates on 1-year ARMs came in at 3.35 percent (0.7 point), compared to 3.27 percent the previous week.
A separate study released by Bankrate Thursday, which derives its figures from data provided by the top 10 banks and thrifts in the top 10 U.S. markets, shows that 30-year rates among its covered lenders already hit the 5.00 percent (0.4 point) mark this week. That’s up from a 4.89 percent average reported by Bankrate last week.
It’s the first time since May that the 30-year rate has hit the 5 percent threshold in Bankrate’s study. As recently as November 3, mortgage rates were at a record low of 4.42 percent, according to the tracking firm’s analysis.
The average 15-year fixed mortgage increased to 4.37 percent (0.38 point), and the larger jumbo 30-year fixed rate rose to 5.58 percent in Bankrate’s study.
Adjustable rate mortgages were also higher, with the average 5-year ARM jumping to 3.95 percent and the average 7-year ARM climbing to 4.36 percent.
Bankrate surveys a panel of mortgage experts each week to gauge which way they think rates are headed over the next seven days. Nearly three-quarters of the panelists, 73 percent, expect mortgage rates to increase and only 7 percent predict rates to decline. The other 20 percent forecast that rates will remain more or less unchanged over the next week.
The refinance index slipped 2.5 percent from the previous week and the seasonally adjusted purchase index jumped 9.3 percent to the highest level since the week ending May 7.
The unadjusted purchase index was up 9.1 percent compared with the previous week, but still 34.7 percent lower than the same week a year ago.
“The increase in purchase activity was led by a 17.2 percent increase in FHA applications, while conventional purchase applications also increased by 3.6 percent,” said Jay Brinkmann, MBA’s Chief Economist, in a release.
Brinkmann noted that FHA loan apps may have jumped as borrowers rushed to get applications in before the new FHA requirements took effect on October 4th, which include higher credit score and down payment requirements.
The increase in purchase activity pushed the refinance share of mortgage activity to 78.9 percent of total applications from 80.7 percent the previous week.
Keep in mind the MBA’s weekly survey covers more than half of all retail, residential loan applications, but does not factor out duplicate or rejected apps, which have surely increased since the mortgage crisis got underway a few years back.