The Adjustable-rate Mortgage or ARM seems to be having a come-back as a trending financial product. At Palm State, we’ve noticed more house hunters and mortgage buyers have questions about today’s Adjustable-rate Mortgages. and it seems a good time to give buyers some details about them. You will find some of these details are good. Some are bad
and some are just plain ugly.
But all of these details add up to a picture of the Adjustable-rate Mortgage, which is the topic of today’s Palm State Mortgage Blog.
Adjustable-rate Mortgage: Just One Dish on the Mortgage Buffet
Once you are in search of a mortgage for a home, you realize choosing the house was the tip of the iceberg compared to the job of choosing a mortgage on a property. There are many types and flavors of loans available.
- On the one hand, you have government-backed VA and FHA loans.
- On the other hand, you have conventional fixed-rate 15-, 20-, or 30-year loans. So many choices!
- Then enters the ARM loan, wrapped in a tarnished reputation, but still looking good. Perhaps someone has already warned you about this “handsome stranger” of the mortgaging world. Perhaps you just never even understood the meaning of the Adjustable-rate Mortgage, alias ARM.
Some Bad History: A Naughty Reputation for the Adjustable-rate Mortgages
You see, the ARM got a bad reputation “during the housing market crash of 2007. Poorly placed ARMS brought “many banks’ lending practices under the microscope of scrutiny.”
History explains that “During that time, lenders would often use ARMs, which carry lower initial interest rates, to get borrowers’ payments where they need to be to qualify for loans.”
That doesn’t seem to be a bad thing, does it? But there was a trick. Yes, this is the “Ugly” part from our title on this article. You see, “When the interest rate would adjust, borrowers would be stuck with a higher interest rate. You know what happened next. For many borrowers, this meant they were suddenly trapped with “a higher payment they simply couldn’t afford.”
What Exactly is an ARM or an Adjustable-rate Mortgage?
“An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down.”
1. The Mortgage Marketer’s Point: Typically, “The initial interest rate is lower than that of a comparable fixed-rate mortgage.” This is a major point of attraction for mortgage searchers. And it is a huge selling point for this type of mortgage product.
2. The Unvarnished Truth: “After that period ends, interest rates — and your monthly payments — can go lower or higher.” (Just guess which way they typically go.)
Alright, to tell the truth, we cannot really predict Interest rates. They have trended up and down over multi-year cycles. In case you have not noticed, we started on in the upward direction about 2016.
However, do you remember the crazy low-interest rates for the five years previous to 2016?
A Call To ARMS?
What you will get with an ARM is a lower initial rate. That nice, comfortable rate will normally last for 3, 5 or 7 years.
Now, keep in mind, this is still a 30-year mortgage. However, the interest rate fluctuates because of various factors. We’ll call the main financial factors influencing Interest and your mortgage payments rates “The Keys to Your ARM.
Key 1. Incredible Interest Rate Indexes and Your Adjustable-rate Mortgage
“ARMs are tied to an index of interest rates such as the London Interbank offered rate, also known as Libor.” Before your eyes glaze over with too much detail, simply understand this main point: “Libor is one of the benchmark rate indexes used by leading banks to dictate what they’ll charge each other for short-term loans.”
Key 2. Magical Margins
Here is another reason the mortgage rate for an Adjustable-rate Mortgage goes up or down. “The loan margin is established when the loan is initially approved and remains fixed for its entirety. The margin is a fixed percentage that is added to a loan index rate to obtain the fully indexed rate for an ARM.”
At Palm State Mortgage Company, we believe this key to the Adjustable-rate Mortgage is easier to understand if you look at a little math. Therefore, let’s say that your index rate is 3%. Then let’s say your margin is 3%. Thus your indexed interest rate will be 6 percent. (By the way, sometimes you can negotiate your margins with a mortgage lender.)
Key Number 3: Cool Interest Caps
Adjusted Rate Mortgages typically have a couple of cool caps. One cap defines a maximum interest rate. The second one, greatly of interest to borrowers, is a periodic cap. The periodic cap actually limits the amount the interest rate can change within a single adjustment period.
Adjustable Rate Mortgages: Gaining Popularity
Now that you have a keen grasp of Adjustable Rate Mortgages, you might or might not be surprised that they are gaining in popularity. In Part 2 of our 2-Part series of blogs about ARMS, we will look at some reasons we have seen more buyers choosing to use this type of mortgage.
Even if you don’t choose to use the ARM, you might benefit from knowing the details we will reveal in Part 2, next week. Thank you for reading the Palm State Blog and Happy House Hunting to you hardy winter-time shoppers. (Even though our winters are mild, it’s still winter-time for the housing market. You are going to receive absolutely first class service all the way up and down the line of professionals in the housing industry as you shop out of season. Of course at Palm State Mortgage Company, you will receive world-class service any time of the year.)