Mortgage- Adjustable Interest Rate Loans

With the mortgage rates on the rise, the Adjustable Interest Rate Loans will more than likely start to go up and possibly give those homeowners the benefit of a lower rates initially.

Mortgage interest rates are up just a little, but do not be dismayed, they are still viewed as low, compared to before the mortgage crisis. The ARM (Adjustable Rate Mortgage) is a lower rate for the initial beginning of the mortgage loan. I, however, do not recommend an ARM loan, and that is for many reasons, but if you understand the product and what you are getting in to, it is an option.

The negative about ARM loans: the interest rate WILL NOT stay the same for the life of the loan. I am very adamant about this due to the following: I have seen borrowers get loans with interest rates in the 3% range. But, guess what; their rate changed every 6 months. Some of these were called the Libor ARM. There was also an ARM Product that allowed a very low initial rate of interest, as above and the borrower could pay a minimum payment, a fully amortized payment or an interest payment, called the Option ARM. These loans I am sure, probably do not exist any longer….this is one of the MELTDOWN PROBLEMS.

The problem was, if you do not pay a fully amortized payment, you are not making principal payments (balance stays the same) and you could have negative amortization if you paid only the minimum payment or interest only payments without touching the principal;  then when the loan was modified; the balance was greater than the original loan amount.

During the Subprime high a lot of ARM mortgage loans were made (not just the Option ARM I have mentioned, but most ARM loans with lower rates) to HELP EVERYONE OBTAIN HOME-OWNERSHIP,  several years ago now….these loans have started to adjust and guess what; the payments increased over and above the homeowner’s budget. Most people do not stop eating to pay their mortgage payment. I am not being funny, just truthful.

Mortgage Rates Today- 2/3/2017 are sitting at about 4.23% for a 30 year fixed, 3.03% for a 5/1 ARM Rate.  **give or take depending upon the lender.

ARM loans may be helpful for someone who is transferred with their employer on a regular basis, every 3 to 5 to 10 year period; therefore you have the advantage of the lower rate until you pay off the loan when selling. ARM loans always adjust from that initial rate. FHA 1 & 3 year hybrid ARM loans have an adjustment of 1% after the first change date and a 5% life of loan cap. The 5, 7, & 10 year hybrid ARM has a 2% initial rate adjustment, after the first change date, with a 6% life of loan cap.

FNMA ARM Products are 1 yr adjustable, 3, 5, 7 & 10 year adjustable loans. These ARM loans are with 1% to 2% after the initial adjustment period and life caps from 5 to 6%. The 7 year (fixed for 7 years) & 10 year (fixed for 10 years) ARM loan can have an initial rate increase up to 5%. STAY CLEAR OF THESE LOANS UNLESS YOU ARE SELLING AND MOVING WITHIN THE INITIAL FIXED RATE PERIOD. THAT’S JUST MY ADVICE! Take it or leave it; 5% would really make a big difference in your payment!!!! As I have stated, each situation is different, therefore this might be a product you could afford, if you know your earnings will increase to afford the much higher payment. Remember the loan will adjust every year after. I do not want to get more involved with details (and believe me, there is more detail, too much to mention) with ARM loans at this time. You may be saying you have just flipped me out and leaving me stranded. I certainly do not want you to be confused, and ARM loans have a purpose, but for “specific applicants”.

I believe the FIXED RATE mortgage loan is best practice. Why? You have your rate over the life of the loan and if you qualify for this rate, unless your earnings go down or you loose your job, with careful financial planning, you are set with the fixed rate mortgage loan.  

Now is the time for fixed rate loans if there has ever been one due to the lower interest rate.  Why obtain an adjustable rate loan when the fixed rate loans are so low?  Some of the reason that so many people obtained ARMs during the Subprime high was so that they could qualify (the debt to income ratio needed to be a certian figure) for the house that they wanted. Normally the sale price was higher than the one they could qualify for if they chose a FIXED RATE product.

I am not slamming the market; these are just facts that happened and many borrowers will tell you now that this is true.  They had the lower rates and sometimes interest only and did not put money into the principal and did not understand what could happen when the loans began to adjust.  This was great for the mortgage company but bad for the consumer.

A fixed rate product gives one an interest rate for the live of the loan.  It stays at the same rate for the entire term, and will not adjust up or down, unlike the ARM (Adjustable Rate) loan product.