The Return of Adjustable-Rate Mortgages
Memorial Day is in two months. What is significant about that fact? First, it marks one year since we saw interest rates rise. If you remember, as we headed into that Memorial Day weekend of 2013 average rates for conforming 30-year fixed loans sat at 3.5% When we all came back from our three-day break we saw rates rise a full 1% in the first week of June. In one week! Over the last 10 months we’ve seen rates fluctuate a bit but currently 30-year fixed rates still sit at 4.5%, representing the same increase we saw in last May.
Now that the winter housing data is being released it confirms what we’ve all felt for several months now. The market has slowed. Home value gains have slowed down, foreclosures and short sales are not a major part of our market, loan volume has dropped to it’s lowest level since 2008, and buyers seem harder to find than Jeremy at a parent-teacher conference.
As banks look for ways to offer more loan products to capture more buyers we are seeing the return of adjustable-rate mortgages. Hold on you say! Those are the loans that fueled the housing market explosion this past decade which led to the housing implosion. Yes, and you would be right. But these are not your older brother’s ARMs. There are now regulatory measures in place that make these loans very safe. Here is a comparison of the old ARMs and the new:
Buyers qualified on the start rate
Buyers qualified based upon the interest only payment
The cap on the initial rate adjustment was as much as 5%
Once the fixed period ended you were most likely to see a huge increase in payment
The fixed period of the loan term was as little as 1 year
Rate adjustments could be as often as every 6 months
Buyers are qualified based upon the fully indexed rate plus 2 or 3%
There is no interest-only payment option
The cap on the initial rate adjustment is 1%
Once the fixed period ends you will never see a huge spike in payment
The minimum fixed period of the loan is 3 years
Rate adjustments for most loans are once per year
There are also 5 and 7 year fixed periods that offer most home buyers two loan options that are really worth considering. For example, the difference between a 30-year fixed loan and a 5-year ARM right now is 1.25% in rate. That’s huge! And if you find yourself at the end of the 5-year fixed period without the ability to refinance the home or sell it you can rest assured knowing that your payment will not skyrocket. The underwriting guidelines now in place ensure that is the case.
If you’ve ever asked Is it really hard to get a loan right now? click the question you just read.