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ARM’s are not ALWAYS a Dirty Word!
With the continued run of low interest rates there is a phenomenon that has gone largely unnoticed lately. That is the fact that the spread between the benchmark 30 year fixed mortgage and ARM’s (adjustable rate mortgages) has become quite large. This leaves an opportunity for perspective home buyers to buy more house and/or have a significantly reduced payment for a 3 to 10 year period. This can be a great option if you are looking at an ownership period that fits within the fixed rate period of the ARM. I am not referring to any of the “exotic” products that helped lead us into this economic mess but rather good, old fashioned, full doc, sanity based ARM’s!
Let’s take a look at what is available under the FHA loan program. I’ll concentrate on these as these are the most attractive adjustable products on the market today. FHA offers bot a 3/1 and a 5/1 ARM with as little as 3.5% in down payment requirement. The index they are tied to is the 1 year treasury constant maturity and they carry a margin of 2.00 to 2.250 (very low by conventional loan standards). Centering on ythe 5/1 ARM, currently we have a start rate of 3.750%! This is how a typical ARM works:
- Current Index Value .390%
- Margin 2.250%
- Implied Rate 2.640%
The loan itself has caps of 1/1/5. This means at the first adjustment the rate can go up or down no more than 1% (this would be at the end of the 5 year fixed rate period). Thereafter, the loan adjusts every 12 months with a maximum movement of 1% each adjustment and can never go up more than the 5.000% cap over the life of the loan (maximum lifetime interest rate in this example would be 8.750%). When looking at the implied rate above, if you were at the end of your five year fixed period and were to adjust today, your rate would move towards the implied rate or in this case would go down from the starting 3.750% rate to 2.750%! Over time there is likelihood that the ARM rate will go up but on this particular FHA program any borrower would safe for a targeted ownership period of 5 to 7 years and could save significantly on interest costs.
With a comparable fixed rate loan at 4.875%, the interest savings on the 5/1 ARM over the first 5 years would be approximately $13,883 and your actual loan balance on the ARM would be $3,968 lower when compared to the fixed rate loan. These numbers are based on a $250,000 loan amount.
No negative amortization, no dangers of recast, no prepayment penalties, no hidden whammies, just a good old fashioned conservative ARM that can save money in the form of reduced monthly payments, reduce interest costs, and make that dream home more affordable and comfortable!
Useless Information
- 47% of home buyers in calendar year 2009 were first time home buyers, an all time record! (National Association of Relator)
- Supreme Court Justice John Paul Stevens turns 90 tomorrow. He has announced that he will retire from the court this summer. Stevens had a life expectancy of 57.4 years when he was born in 1920. The life expectancy for a white male today is 76.5 years. (except if you work in the mortgage business!)
- There are currently more than 79,000 Americans that are age 100 or older
- The total number of births in America in 2007 was 4.3 million, the highest number of births in our country for a single year in history. The previous high was set in 1957.
- Our local Oakland A’s had the worst attendance record in baseball in 2009 with a lowly average attendance of 17,392 per game. In comparison, the Chicago Cubs averaged 10,892 for their 2010 SPRING TRAINING SCHEDULE!
No other useless facts for today – just remember to keep the faith, keep your head held high, and keep living the dream each and every day!
Easy Reference Tax Credit Matrix
Click on the link above for a easy reference copy of the avaialable tax credit at both the State and Federal level. This gives information on the amount of the available credit as well as details for qualification and deadline dates. Thanks and I hope you find this helpful.
Saturday Social Commentary
You Tube is fun, fascinating and can be informative. During the entire health care debate many of the proponents of the bill would point to Canada and their progressive system of socialized (national) health care. I came across an entertaining tidbit on You Tube that, while it requires and investment of 20 minutes of your life, is worth the time it takes to view. Here is the piece, so grab some popcorn and enjoy – I welcome any comments and encourage anyone who is concerned about the direction of our country to pass this along.
Saturday’s Thoughts
Well it was not a boring week in our industry and the volatility and uncertainty remained in regards to mortgage rates. The short term looks fine but the big question remains is what will happen over the longer term. March 31st marks the end of the Federal Reserve’s MBS buying program and there is much speculation as to what will happen with mortgage rates when that day comes. The early betting line has rates spiking anywhere from 25 bps to as much as 100 bps. This means that today’s 4.875% @ 1.000 point cost on a 30 year fixed rate mortgage becomes somewhere between 5.125% to 5.875% for the same 1.000 point cost.
I wanted to take some time and push a “movement” that is gaining momentum. That is the movement to eliminate or change HVCC (Home Valuation Code of Conduct). If you work in or around our industry you are most likely familiar with HVCC and the havoc it has wreaked on our industry. It was designed to protect the consumer but instead it has cost the consumer more, given consumers and us in the industry poor quality appraisals. forced home values lower, and has put numerous competent professionals out of work. This You-Tube video helps explain what is going on and what you can do about it. Please take a few minutes to watch and listen and if you are so inclined, to sign the petition.
That is all I have for this morning. Remember that we are always here for all of your mortgage needs and we are here to help. You can reach us by placing and comment or using the contact form below. Thanks and have a great weekend.