Why Many Buyers Might Be Better Off With an ARM


Filed under: Market Comentary


With mortgage rates at record lows, it has been rare for buyer to opt for anything other than a fixed rate loan.  However, as market conditions begin to sway and we’re seeing a slight uptick in rates, many buyers may be smart to consider a hybrid ARM (Adjustable Rate Mortgage).  This is a loan where the initial rate stays fixed for a period of 5-10 years and then it becomes adjustable based on market conditions.

ARM - Adjustable Rate Mortgage. US Dollar texture.In making this decision, here are a couple of key points…

Minimal Risk is Involved

These hybrid ARMs are not the loans that led to millions of foreclosures nearly a decade ago.  Most of those “risky” mortgages were sub-prime loans with huge pre-payment penalties, no down payment money required, and high rate second mortgages on the back of first loans with either balloon payments or massive rate adjustments occurring after the first two years.  Not to mention, most were interest only payments.  So, when payments started jumping up and homeowners had no or even negative equity, walking away actually made financial sense.

Instead, today’s hybrid ARM products require down payments (assuring that the borrower actually has some equity in the property) and fully documented income (assuring that the borrower can actually afford the payment).  Gone are the interest only payments, pre-payment penalties, balloon payments, and high rate second loans.  Bottom line, multiple layers of risk have been eliminated.

Lower Payments and Easier to Qualify

Since the initial rate on an ARM is lower, it translates into a lower monthly payment than a fixed rate loan, making it easier for the borrower to qualify.  For home buyers that are having a tough time finding a property within their price range, that dip in payment may be just enough to help them qualify and having that lower payment initially is also a big stress relief for most new home owners.

Statistics show that borrowers since 2003 who were wise enough to utilize a hybrid ARM have consistently outperformed the fixed-rate market.

Americans Move Every Seven Years

According to the National Association of Realtors, first time home buyers typically expect to stay in their new home for 10 years.  However, the reality is that they end up moving after an average of only five years.

Repeat buyers don’t stay in their homes much longer, electing to move after an average of only seven years.

These statistics point to the fact that most Americans could save thousands of dollars over the life of their loan by having an ARM rather than a standard 30-year fixed rate mortgage.

For more information or to find out the current rates on the various hybrid ARM products available, feel free to contact me.


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