Adjustable Rate Mortgages
Our home mortgage lenders specialize in providing low rate ARM's and payment option mortgages for purchase and fixed mortgage refinancing.
- Cash Out Refinance
- Debt Consolidation Refinancing
- No Equity Refinance
- Stated Income Refinance
- No Income Documentation Loans
- Non-Conforming ARM, Interest Only
- Government - FHA, VA
- Home Equity – Fixed Rate or HELOC's
- Home Construction Lending
An adjustable rate loan can be a useful tool when fixed rate loan rates begin to rise. In recent years, many lenders have introduced some very creative programs which can give you an opportunity to actively manage your loan payments. Adjustable rate loans have a rate that is fixed for a specific period of time and then begin to adjust periodically. When evaluating any adjustable rate loan there are several things in addition the rate that you will need to evaluate.
1) Fixed Period - An adjustable rate loan will always have a period of time where the rate is fixed. These fixed periods can range from 1 month to 10 years, although many lenders have dropped their 10 year offering as their pricing was actually higher than fixed rates. As fixed rates rise, it will be interesting to see if they make a comeback. There are several measures you should consider when looking at the fixed period such as the length of time you plan to remain in the home and your tolerance for potential changes in rate in the future. One good way to think about this is to consider who is assuming that risk. In a 30 year fixed loan, the lender has assumed all of the risk, and you have none so that loan will have the highest rate. At the other end of the scale is the 1 year adjustable rate loan where you have assumed most of the risk and the lender prices the product accordingly.
2) The index the loan is written against is one of the most important factors to consider and I am constantly amazed when I talk with a potential client that another lender simply gave them an interest rate without even discussing which index the loan is tied to because the index will have a huge impact on your rate after the fixed period. In years past, an adjustable rate loan was usually tied only to the 1 year constant maturity treasury index (the average cost of short term borrowing by the Federal Government). However, today loans are available which are tied to many other indexes such as:
- 12 MTA - A variant of the 1 year treasury is an average of the most recent 12 months. Very stable
- 10 year Treasury Index Stable but not too popular with lenders.
- LIBOR - London Interbank Offering Rate. A 1 month and 6 month index are available. Extremely stable
- COFI - Cost of Funds Index for the 11th Federal District. Stable
- COSI - Cost of Savings Index. Unacceptable stability.
- CODI - Cost of Deposits Index. Unacceptable stability
- Bank Prime Rate. Very unstable, used primarily for home equity lines of credit
Here is a 10 year average comparison between a 30 year fixed and fully indexed LIBOR, MTA, COFI, and the 1 year Treasury Index.
- Fixed 7.710%
- T Bill 7.708% average of 4.833 with a 2.875% margin
- COFI 7.490% average of 4.590 with a 2.9% margin
- MTA 7.442% average of 4.942 with a 2.5% margin
- LIBOR 7.102% average of 4.852 with a 2.25% margin
Popular ARM Mortgage Loans Lose Their Luster
According to the Wall Street Journal, he Demand for option adjustable-rate mortgages have declined nearly 25% in recent months, according to estimates by UBS AG, as short-term interest rates rise and regulators express growing concern over the risks associated with these loans.
Ruth Simon recently wrote an article about the declining popularity of option ARMs that have accounted for over 30% of jumbo home mortgage loans, global financial firm UBS says. Many borrowers flocked to option ARMs due to their attractive introductory rates—some as low as 1 percent—that are used to establish the minimum payment for the first year. However, the "teaser" intro rates last for just a short period of time and is then followed by a jump to above 5 or 6% and on up as short-term rates creep higher.
As payment option ARMs fall out of favor, fixed-rate loans are becoming more popular again. Some analysts now say this is likely the end of the era in which creative new mortgage products have made it easier for a wider range of borrowers to afford increasingly pricier residences.