Bryan Sumner
This article is to help anyone who does not understand the full scope of an ARM loan. I have never advised my clients to obtain an Adjustable Rate Mortgage over a Fixed Rate Loan. If the client wanted the product and they were knowledgably about and understood that the interest was going to adjust from the initial rate; I had no choice but to give them their wishes. I have been in mortgage lending for 30+ years and have worked in origination (loan officer), underwriting and operations so my knowledge is that most people do not have a full understanding of the ARM loan. ARM features are complex and have to studied even by the loan officer. If they cannot give your answers you probably need to see further.
It does not mean that it is never a necessarily bad product, and there are times it can be favorable but for the average client it may not be. I do not recommend ARM loans for the person who is in a standard income situation in which they do not see significant increases in salary and who intends to stay in the home for an undefined amount of time and especially to just be able to buy the home.
The interest rate simply put, will not stay the same for the life of the loan. I am very firm about this due to the following: I have seen borrowers get loans with interest rates in the 3% range. But, guess what; their rate changed every 6 months, sometimes after the first six months and sometimes after the first year, depending upon the type ARM product it was. They did not understand or have a clue that this Libor ARM sometimes fluctuates every six months. Yes, it is the duty of the Loan Officer to inform their clients. Some of these were called the Libor ARM. The client’s income did not rise, but the ARM rate and payments did. I am repeating this over and over I know but an ARM loan rate will change and sometimes frequently.
My recommendation to any applicant is to make sure you know exactly what type ARM you are getting, when it will change the first and then thereafter. You should get an ARM disclosure which is required by RESPA. It is the Loan Officer’s responsibility to Educate borrower.
ARM loans can be helpful for someone who is transferred with their employer on a regular basis, every 3 to 5 to 10 year period; therefore you have the advantage of the lower rate until you pay off the loan when you sell you home. ARM loans always adjust from that initial rate and if the market changed drastically, the payment changes drastically also. Normally the adjustments for each period have caps so that they cannot rise above one to two percent, depending again on the product.
FHA (Federal Housing Administration) 1 & 3 year hybrid ARM loans have an adjustment of 1% after the first change date and a 5% life of loan cap. The 5, 7, & 10 year hybrid ARM has a 2% initial rate adjustment, after the first change date, with a 6% life of loan cap.
FNMA (Fannie Mae) ARM Products are 1 yr adjustable, 3, 5, 7 & 10 year adjustable loans. These ARM loans are with 1% to 2% after the initial adjustment period and life caps from 5 to 6%. The 7 year (fixed for 7 years) & 10 year (fixed for 10 years) ARM loan can have an initial rate increase up to 5%. The latter 5% would really make a big difference in your payment!!!! This is not what I would call a product for the moderate American. As I have stated, each situation is different, therefore this might be a product you could afford, if you know your earnings will increase to afford the much higher payment.
There are plenty of reason people choose ARM loans. It is an initial lower rate of interest and payment which may be essential in some cases to allow a borrower to qualify for the loan. Again, it is the Loan Officers responsibility to make sure they are giving the client the best product that will be of value to them down the road and not just something to get the loan done. This has happened in the past and it is not to the client’s advantage. My advice is to be informed at all cost. Ask questions and get answers.
Tags: Adjustable Loans, ARM Features, ARM loans, mortgage loans, Rate Changes
Posted in Mortgage · March 7th, 2010 · Comments (0)
It has been one of the most disturbing times in the history of our Country and many people have lost their homes and others are struggling to keep theirs. Part of this is due to the fact that mortgage lending spent more time in making loans than teaching the applicants the pros and cons of different products, increasing housing expenses and having sufficient assets before buying a home. There was not sufficient education. This is not intended and after the mortgage meltdown. From the days when it is a cut and dried guideline with conservative policies and procedures to the days of desk top underwriter, loan prospector and SubPrime lending.
I do not believe anyone had envisioned what the effects of SubPrime lending could cause until it was too late to change anything. All parties, not just the SubPrime lenders and Investors, but the Banks, Mortgage Companies, Correspondents and even FHA were already absorbed with this misleading err of mortgage lending to some extent. In other words; guidelines changed so that more borrowers could get financing at less restrictive rules.
There are always many contributing determinants such as job loss and added expenses. Some of these extenuating circumstances were due to job losses, less working hours and the like but a lot of people were already in over their heads.
What went wrong? Basically, loans were made to people who could not financially afford the loan when it was made and did not have assets for the first payment in reserves at closing. Secondly, too many arm loans (adjustable rate loans) were made with very low interest rates so that the borrowers could qualify (debt to income ratios of 50% and the normal guidelines is 36%) for the loan. Some of these ARM loans started to adjusted in three (3) years, some in five (5) years then each year after. Thirdly, when these ARMs started to go up to the higher rate, (after the 3 yr. period, etc.) the already stricken borrower who has obtained a loan they barely could afford with help from the less restrictive guidelines to begin with could not make the payments and pay all their other expenses.
Another part of this mortgage dilemma was the 100% financing which got the borrowers into the house with no money down; a first mortgage of 80% and a second mortgage of 20%. Now, when they need to refinance their home; they can’t in some cases as the property value has declined and there is no equity.
When we are looking for a new home, it is kind of like wanting the piece of pie. We want the biggest piece with ice cream on it. There were a lot of borrowers who bought homes that were not in their means Again, the rules and regulations allowed this…so now the applicants are loosing these nice, large wonderful homes. It might have been better for some if they had bought a home within a lower sale price range and they should have been counseled to do so and were not.
Every American deserves a home, but they also have to continue their meeting other financial liabilities in a manner that will give them the necessities for everyday living. Applicants were educated to the effects of negative amortization; interest only loans or the Option ARM loans that were high on the market at that time.
Will we rise above this fall? We usually do and I certainly hope so. The agencies, banks and mortgage companies have changed their directives which are more restrictive and balanced; but this will only help the future, it cannot help those who have already experienced the loss of their home and those who are struggling now to keep theirs. The Obama Administration modifications, forbearance, and refinances are helping some borrowers to manage to stay in their home and get their financial status back to normal. I think everyone has learned something from the financial crisis.
Tags: Mortgage Crisis
Posted in Mortgage · March 4th, 2010 · Comments (0)