ARM- Adjustable Rate morgages options
 

We're trying to refinance our house and the appraised value is not where we need it to be. The loan officer suggested we look at an ARM. He said they are not what they used to be and there are several options for them now. An ARM scars the zhit out of me but maybe things have changed. Anyone here know the products well enough to talk turkey?

I've heard it said that statistically over the life of a 30 year term an ARM ends up costing less.

I have nothing to back that up with.

Under the correct conditions I can see that being true.

In other words, timing.

There are some people here with better knowledge of the subject than me so till they chime in I have a pretty chart for you.

Wish I had one for the coming 30 years as that would be more helpful.

Personally I don't see money getting any cheaper or not enough to make much of a diff on your monthly nut. Best bet is it only goes up from here which ='s not good for an ARM.

http://mortgage-x.com/images/graph/r_30_prime.gif

I've had several ARM's and they have often adjusted down. It all depends on how long you plan to stay in the house and if you want to make extra principal payments.

I had a 5/1 interest-only LIBOR ARM on my house in VA. I did that because I couldn't imagine keeping it more than three years and didn't make as much money then. That was seven yrs. ago and I still own it. But the ARM went to 30 yr. amortization after the 5th year and adjusted down. It started out at 4.675%, bottomed out at 3.0% and just went up to 3.125%, which is a $17 per month increase over 3.0%. Not gonna kill me. At this point, as long as I can raise my rent every other year or so, I'll not be out any extra money if the ARM moves up a little. It's way too low to even consider refi'ing into a 30 yr. fixed, especially since it's now an investment property.

This is the one we're looking at..........

Mortgage Type:
Right Time 5/5 ARM
Advantages:
Initial interest rate remains the same for the first five years. After that the rate can only change once every 5 years.
Suncoast will pay up to $2500.00 of your closing costs. (see website for details)
90% Financing available for the purchase of a primary residence without Private Mortgage Insurance (PMI) or up to 95% with PMI.
Cash out up to 80% LTV for the payoff of your 1st and 2nd mortgage or SSFCU accounts.

Best Choice If:
You plan to stay in your home 10 years or less.
You need to maximize your purchasing power by selecting the lower rate ARM with a lower initial payment.

Disadvantages:
It's riskier than the 30 year fixed rate if you don't expect your income to increase over the initial 5 year period to cover the possible increase in your monthly payment.

ARM Features:
Rate caps =2.0% per annual adjustment and 6% over the initial rate for the life of the loan.
Index = 5-year CMT
Margin = 2.50%
Interest rate remains the same for 5 full years. The rate adjust every 5 years thereafter

The APR for the above is 3%.

3% is pretty good, and five years isn't bad. The housing mess will sort it self out in 5 years, but I think it will dip more before that.

What's important to ask about is the rate adjustment.

I seem to recall way back in the day when I was considering an ARM the deal was the rate did not change during a specified time period in terms of your monthly payment but the difference in rate was tacked on to the back end. So if the rate went up you did not pay more but the length of your loan got extended.

Something like that.

Negative amortization, good point, that will bite you in the ass.

ARM Features:
Rate caps =2.0% per annual adjustment and 6% over the initial rate for the life of the loan.
Index = 5-year CMT
Margin = 2.50%
Interest rate remains the same for 5 full years. The rate adjust every 5 years thereafter



This first statement has me asking....OK the rate stays the same for 5 years but the 2% annual adjustment starts on year 1 or on year 6?

You need to ask the bank to spell it out.

But to me what it means is if you start with 3% and prime goes to 6% within the year on year two your interest rate will be 5% but you'll only pay 3% for the next four years but the extra 2% will be added to the back end. Rinse and repeat for a max increase to 9% over the lifetime.

Good god.... stay away from from that broker and adjustable rate mortagages.
Find a fix and lock!!!!!! There hase never been a better time to lock on investment property.
MJC

No reason to be afraid of an ARM, just make sure you understand the terms. If you plan to stay put for a long time it might not make sense but you still need to figure it out for your situation. The 5/5 is a little odd, most common seem to be 5/1.

I hedged and went with a 7yr ARM although I plan to move sooner. Biggest question I had were what is the basis for the rate, how frequently does it adjust and what is the max adjustment, each time and total.

That sounds like an option ARM and would be a disaster for all but the savviest of real estate investors. Option ARM's are a large part of why we're in the mess we're in now - people didn't know what the hell they were getting into and/or just assumed their houses would appreciate fast enough to refi out of the negative equity when the time came. It's similar to walking into a used car dealer and saying you can afford anything as long as the payments are real low.

Just make sure you know the terms - index, margin, caps and adjustment periods.

Given which way interest rates are eventually going to head (and the speed at which I suspect they're going to do so), this shiuld be a MAJOR consideration... You think people are underwater now?!?! With one of these in a rapidly escalating interest rate environment I could easily envision a scenario where someone goes from being at or near the break-even point relative to inflation to being WAY behind the curve with one reset - as in losing 10+ years in a single reset.

I'm sure someone can come up with a scenario for which an ARM is appropriate but with current rates, I think a person would be insane to consider a non-fixed-rate product of some sort now, generally speaking.

For me, length of time in residence didn't factor in too much. If we move anytime soon, I plan on renting this place out as an investment property - a VERY large motivation for me to buy was to have an inflationary hedge against what I suspect are double-digit inflation numbers right around the corner (5-10 years at most).

Of course most people don't look out that far and only to next quarter or maybe next year...

Just get a 30-year fixed. I don't see anything in your original post that makes a case for doing any differently.

ah...just had the house appraised today myself...waiting on the results.

I hate this part.

ARM or Fixed is usually determined on payment requirements- typically banks are more generous on LTV (appraised value) when a fixed product is involved vs an ARM.

You sure that's what they said? I'd do a fixed in this environment unless you know for sure you are leaving in a few years.

rjp

Another option is to challenge your appraisal. My neighbor did this on a re-fi and was able to argue a much higher value. This was about 6 months ago so I am not talking about the "good old days."

The bottom line is her house is way crappier than mine and her appraisal is more than I can sell my house for. I don't know what she did but I seem to recollect that she had some low comps thrown out.

Since you can qualify, your value isn't so far off.

Good luck.
Larry

Actually the comps were pretty close to ours. Not much to argue I'm afraid.

We're just trying to get the payment as low as possible due to loss/change of job with lower income situation that I'm in right now. Cash flow is what is killing us. Long term planning is on hold. We're not behind on anything and don't want to be therefore some options are off the table, (bankruptcy) and we're not underwater with the house value. We're stuck in the middle.

Just hear back from the loan officer. We'll be saving $352/month, rate will not change for 5 years, at year 6 it will only go up 2% which is where we are now with a 5% rate. They are paying $2500 of the closing costs. At the closing we will pay nothing.
It's a no brainer.