Solano Real Estate Scene: Let’s talk about the forgotten ARM
Adjustable-rate mortgages have been out of style for the past 12 years. There are licensed loan officers, with seven to 12 years of experience, who have never closed an ARM loan.
The reasons for the drop-off in this type of mortgage are:
No. 1: Some of the ARM loans sold from 2004 to 2007 were terrible, and many mortgage companies around America sold consumers ARM loans they knew would likely become unaffordable in the future. Good ARMs got a bad rap.
No. 2: Fixed-rate mortgages have been very low the past 12 years and because of the yield curve, a 5-1 or 7-1 ARM rate has only been slightly lower than the 30-year fixed-rate option. A 7-1 ARM is fixed for seven years and then adjusted annually thereafter.
When a borrower can obtain a 7-1 ARM at 1% to 2% better than a 30-year fixed, it becomes attractive for first-time homebuyers who plan to sell in five or six years and move up to their dream home, or the 55-year-old who wants to refinance now and has his or her heart set on selling their home in five or six years and move to their retirement home.
The keys to determining whether an ARM loan makes sense are the terms of the ARM. The index and margin along with the annual and lifetime rate caps are the key factors in choosing an ARM.
A great example of a safe ARM is the 15-15 ARM that we offer to jumbo buyers and borrowers. The rate is fixed for 15 years and then adjusts once for the final 15 years with a margin of 1.3% over the 30-year Treasury bond yield.
Today, the 30-year Treasury index is at 2.2% so if this loan was 15 years old and adjusted today, the rate for the final 15 years would be 3.5%.
The reason I suggest this is a safe ARM is that there is no prepayment penalty, and the borrower has 15 years to pay off or refinance the loan. I always tell people when you have an ARM, you shouldn’t wait until the last minute and hope rates are good when the rate changes.
On the 15-15 ARM, you may refinance at the end of year eight or year 12 if rates are great at that time, or just pay extra every month so the loan balance is paid off in 15 years or so small that the rate changing has little or no impact on your financial life.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.