It sounds like after the term of the initial loan is up your interest rates goes up...if so, why couldn't a person refinance with another lower interest rate ARM?
why WOULDN'T a person want to get ARM (adjustable rate mortage)?
- Thread starter rnmcd
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Because they like knowing exactly how much they will be paying for thier house, and knowing that it won't increase on them in the future. Also, if something crappy happens and forces your credit to be ruined, you're not going to be able to get another low-interest mortgage when you want to refinance. Better safe than sorry.
NO. If interest rates have gone up, your refi will be just as high, if not higher than your current. No one will give you "lower interest rate" than the going rate without a price (points).
We forgive you for thinking interest rates will always be low, but some of us remember the 16% interest rates of the 70's. I'm quite happy to keep my 5.75% rate on a fixed mortgage.
Let's say you could get a 30-yr term for 6.0%. But instead, you opt for a 5-yr ARM at 5.25%.
Now it's 2009 and it's time to refinance. Unfortunately, rates are now 8.5% (or even significantly higher) and it sucks to be you.
With our first house, we knew we (most likely) wouldn't be there for more than five years. So, we opted for the ARM. Sure enough, within five years we sold it and bought another. I plan on being here at least 20 years, so we went with a 30-yr loan.
Now it's 2009 and it's time to refinance. Unfortunately, rates are now 8.5% (or even significantly higher) and it sucks to be you.
With our first house, we knew we (most likely) wouldn't be there for more than five years. So, we opted for the ARM. Sure enough, within five years we sold it and bought another. I plan on being here at least 20 years, so we went with a 30-yr loan.
Vic
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Because available interest rates are subject to market conditions and wildly fluctuating. So after the initial fixed term (usually 2 to 7 years) is up, there is no way to know what rates will be available at that time, and they could be considerably higher than a fixed interest rate available now. As the mortgage collateral is generally the borrower's home, it is not usually considered wise to gamble the markets with the roof that keeps their family dry and warm.
More affluent borrowers usually have more income to gamble with and are less to adverse to risk, so ARMs usually work well for them, but lower income borrowers simply don't have the means. A payment increase of $100 or more per month could run them and cause default and foreclosure.
As interest rates are STILL at historically lows right now, the general concensus is that they will rise in the future. The only guess is when.
It should also be noted than ARMs with initial fixed terms (often called "hybrids") are a relatively recent invention in the mortgage industry, first appearing in the sub-prime market in about '96, and in the conforming market in late '97. Before that time, if you got an ARM, the adjustment period would begin immediately. For example, if you got a 6 month ARM, the first adjustment would be after 6 months, or if you got a 1 year ARM, the first adjustment would be after 12 months etc.
More affluent borrowers usually have more income to gamble with and are less to adverse to risk, so ARMs usually work well for them, but lower income borrowers simply don't have the means. A payment increase of $100 or more per month could run them and cause default and foreclosure.
As interest rates are STILL at historically lows right now, the general concensus is that they will rise in the future. The only guess is when.
It should also be noted than ARMs with initial fixed terms (often called "hybrids") are a relatively recent invention in the mortgage industry, first appearing in the sub-prime market in about '96, and in the conforming market in late '97. Before that time, if you got an ARM, the adjustment period would begin immediately. For example, if you got a 6 month ARM, the first adjustment would be after 6 months, or if you got a 1 year ARM, the first adjustment would be after 12 months etc.
The rate might go up or down after the 1st adjustment term..... and there is a ceiling for ARM program.... the rate cannot go higher than the ceiling. There is also adjustment cap.... every adjustment can't be more than current rate + cap.
ARMs are generally worthwhile if you know you're not going to stay in the house beyond a couple of years.
For semi-nomadic, an interest only mortgage works well and lets the buyer afford much more estate.
Cheers!
Cheers!
Vic
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As the borrower would not be paying down the mortgage to create any equity, that situation would only work so long as market appreciation continues at a near-double-digit rate. That is unlikely. IMO, if a borrower can only qualify for the home with an interest-only ARM, then they really should look at less expensive homes.
Vic
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Not even that long ago really, although that was a time when very many with ARMs got burned. Particularly in the Houston market IIRC, where value overspeculation fueled by low cost ARMs resulted in a bubble after rates hit the teens and a much higher-than-average percentage of the market defaulted.
In my 10 year career in mortgage, rates never went below 6% and stayed there until the fall of 02. That we've stayed down this long boggles my mind. The sub-7% refi boom of '98 lasted just over a year. Just as short a time ago as 2000 (just 4 years ago), mortgage rates were over 8% and the Prime was 9.5%. The worst thing (to me) about the world of business is that very few people remember the past, much less learn from it. The old saying in business is, "If it's been 3 years, it's been forever".
I have many clients that are brokers and you would be surprised at the number of near seven figure mortgages they are sealing. Utterly amazing given what they are making.
Yes it wasn't uncommon for people to paying double digit rates on everything...with perfect credit too!
Cheers!
Vic
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I have no doubt. The Eastern Seaboard housing market from Virginia to Long Island is in the midst of rapid appreciation and overspeculation. I wish I was doing business there. But the correction (I predict) will be brutal when it comes.
The average sales price in the market I do business in is a more reasonable (if still a little too high) $200k.
Pliablemoose
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Bulk Beef
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Two points. June is about right - I procrastinated on the refi for a long time, and just happened to stroll in to the bank on the right weekend. I owe <100K on a house that was appraised then for 230, and some guy on the next street sold the same unit for 290 a couple of months ago. I can't believe people are paying this much for these POS townhouses.
I don't think that interest rates will always be low but I do know that the initial rates for a ARM will always be lower than the 30-year fixed interest rate at the same time.
I see several lenders offering 3/1 ARM with no points so I wonder why a person couldn't get another ARM after the 3 years is up and not pay points.
I guess it might work for me because I only want to live there about 2 years (or less)
If you can say with any type of confidance what the rates will be in three years you have the wrong job.
Vic
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Because (if rates go the way conventional wisdom says they will) the rate on that new ARM will be much higher than if you had just taken out a fixed today.
And there is no such animal as a no-point loan. 'Tis a myth and great marketing. They're just charging you a higher interest rate and pocketing the yield spread instead of points.
edit: and don't be too cocky about wanting to live in your home short-term. If that works for you, great. But otherwise, it costs a lot more to sell and buy a new home than to refi.
I never said I knew what the rates will be in 3 years but I did say that on Oct. 9, 2007 the ARM rate WILL be lower than the 30-year fixed rate.
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