-
We’re currently investigating an issue related to the forum theme and styling that is impacting page layout and visual formatting. The problem has been identified, and we are actively working on a resolution. There is no impact to user data or functionality, this is strictly a front-end display issue. We’ll post an update once the fix has been deployed. Thanks for your patience while we get this sorted.
why WOULDN'T a person want to get ARM (adjustable rate mortage)?
- Thread starter rnmcd
- Start date
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.
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
Elite Member
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.
sharkeeper
Lifer
For semi-nomadic, an interest only mortgage works well and lets the buyer afford much more estate.
Cheers!
Cheers!
Vic
Elite Member
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
Elite Member
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".
sharkeeper
Lifer
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
Elite Member
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
Lifer
Curse you, I'm in for 5.875%😉
Wouldn't do an ARM for anything, rates are headed up.
Bulk Beef
Diamond Member
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.
sharkeeper
Lifer
Montgomery County has gone crazy!
Cheers!
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)
Vic
Elite Member
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.
TRENDING THREADS
-
Discussion Zen 5 Speculation (EPYC Turin and Strix Point/Granite Ridge - Ryzen 9000)- Started by DisEnchantment
- Replies: 25K
-
Discussion Intel Meteor, Arrow, Lunar & Panther Lakes + WCL Discussion Threads
- Started by Tigerick
- Replies: 25K
-
Discussion Intel current and future Lakes & Rapids thread- Started by TheF34RChannel
- Replies: 24K
-
-
