Given the rising and unpredictable nature of mortgage interest rates, more and more industry proponents are talking about the option of adjusted rate mortgages and whether they could inspire more home purchases.
The benefit of using an ARM in today’s market is that it could help consumers justify the purchase, they said, or keep the home they want to buy within their monthly budget.
Since an ARM is truly a risk/reward tool, consumers believe that the reward of a lower monthly payment and reduced interest payments outweighs the risk of increasing their payment after termination. of the fixed period.
Keep in mind, they said, there is no “best” ARM option for buyers. It’s a subjective question. Each borrower has their own financial situation, plans and short and long term goals for the home.
The guiding principle, according to Key Mortgage Services, is that the shorter the fixed term, the higher the risk. So, planning the pros and cons of term length should play a part in what ends up being the best option.
The most popular terms that Key Mortgage Services, for example, are now seeing are 7- and 10-year ARMS, which are the longest options available (compared to 5- and 3-year terms).
MRAs offer buyers “breathing room”
Suzanne Ross, director of mortgage products at Ocrolus, told GlobeSt.com that ARM loan programs are on the rise due to rising interest rates and an optimistic view that within the next five years, refinancing at a lower rate will be possible.
“With rates likely to continue to rise, MRAs should also gain popularity,” Ross said.
“Right now, we’re in a volatile rate environment with a steepening yield curve and still very high demand for housing. ARMs allow buyers some breathing room to lock in a lower rate when buying a a house, and they have the stability of a fixed payment for five or seven years while the economy cools.
Ross said that in a high interest rate environment, ARMs are worth considering over conventional loans.
“We’re still seeing strong demand for homes and low inventory, and ARMs allow buyers to take advantage of lower rates, giving them more buying power. The reduced interest rate allows for a lower monthly payment and provides peace of mind for several years.
“The likelihood of being able to refinance within five years at a lower or even the same rate on a fixed 30-year term is quite high, and that’s a gamble that many homeowners are willing to take right now.
Realtor.com Chief Economist Danielle Hale said, “With the spread between the 5/1 year adjustable mortgage rate and the fixed rate of more than 1%, according to the latest data from Freddie Mac, home buyers looking to maximize their buying power can consider an adjustable rate mortgage.
“A buyer interested in purchasing today’s median listing ($427,000) with a 10% down payment will find that their monthly principal and interest payment is nearly $280 lower with the variable rate product per compared to the fixed rate product.
“That translates to over $50,000 more in buying power (i.e. you can buy a home priced up to $479,000 with an adjustable rate mortgage for the same monthly payment than the fixed rate mortgage given today’s rates – data as of October 13) .
“At a time when home prices remain high and buyers’ budgets are tight, an adjustable rate mortgage can mean the difference between being able to buy a home or not, which is why these mortgage deals are growing in popularity.
Florida, a Viable ARM Market
David Druey, regional president of Centennial Bank Florida, told GlobeSt.com that adjustable rate mortgages (ARMs) can be an attractive strategy to entice sidelined homebuyers with an initial interest rate and lower monthly payments, which may seem more acceptable depending on economic conditions. gap.
“We’re seeing customers strongly considering this product and taking a closer look at the lending options available beyond traditional mortgages,” Druey said.
“Part of the appeal is that in strong regions with projected growth and new population migration (like Florida), there is greater confidence in long-term real estate values, thus a sense of urgency to own has not diminished if someone is not yet a market player, and this is a potential way to achieve this.
Some say, not a big appetite for arms
Esther Phillips, senior vice president and chief sales officer at Key Mortgage Services, told GlobeSt.com that with the yield curve inverted right now, there isn’t much investor appetite for ARMs, which means that there is not much interest in mortgage-backed securities. with ARM loans.
“And, if there’s no investor demand, the price isn’t there,” Phillips said.
“Where we see ARMS is in jumbo or non-conforming loan amounts, as most of these loans are not made with the intention of wrapping them up and selling them in the market.”
She said most are made by banks that seek to keep them on their balance sheet and, therefore, can set their own price of what they want to bring back.
“We see banks of all sizes going in and out of the ARM market until they get the amount they need for their balance sheets, and then they raise rates to stop the flow,” Phillips said. “So it’s much more unpredictable.
“However, if the availability is there and the consumer is made aware of the timing, risks and potential benefits of an ARM adjustment, it can be a great alternative to a fixed rate in this type of pricing environment.
“The key is to understand the risks versus the rewards and that’s what a professional loan officer would do to help the consumer make the best decision based on their profile, needs and risk appetite. .”
ARM programs differ from those of the financial crisis
ARM loan programs are very different today than they were during the 2008 financial crisis, Ross said.
“They’re worded differently to make sure borrowers can afford increases,” she said. “ARMs are now better regulated with adjustment caps, lifetime caps and are underwritten to ensure the borrower can afford upside fluctuation in payments.
“We have learned that payment option ARMs with negative amortization characteristics are not a good idea, and I would generally advise against them.
“It’s important to note that ARMs aren’t for everyone, and the bet is that interest rates could be just as high five years from now. A more conservative homebuyer or someone who doesn’t plan being in a position to want to move or need to refinance in five years would be less suitable for an ARM.
“Conversely, a young borrower who is financially stable and likely to increase their income in the years to come would be better placed to take advantage of an ARM. Lenders are responsible for guiding borrowers to the most appropriate loan program.
Mortgage rates peak at around 9%
Erin Sykes, real estate consultant, chief economist at Nest Seekers International, told GlobeSt.com that she’s starting to see mortgage brokers talking about ARM mortgages again.
“The way ARMs are structured, they can generally be risky for the average buyer, especially when entering a period of economic uncertainty,” Sykes said.
“For those who understand the risks, however, and intend to spend a relatively short time in their home, this could be a viable opportunity.
“I think rates will peak around 9% for the 30-year, and if that’s the case, there’s not as much risk of entering an ARM near the peak rate, as long as one fully understands the variability of rates after the IPO period.”
Also consider buyout loans
Bob Griffith, general manager of home services at Houwzer, told GlobeSt.com that another popular option right now is buyout loans, where the seller can contribute money at closing to lower the rate of interest. buyer interest of 2 percentage points in the first year, and one percentage point in the second year.