Unbelievable!!!!!More Borrowers Are Opting for Adjustable-Rate Mortgages

Discussion in 'Economics' started by misterno, Mar 20, 2011.

  1. http://www.nytimes.com/2011/03/20/realestate/20Mortgages.html?_r=1&hp

    IN the years since the financial crisis, adjustable-rate mortgages, or ARMs, with their low initial interest rates that changed over time, have been considered riskier than fixed-rate loans and shunned by most buyers. But these days more people are being persuaded to give the loans a try.

    More Mortgages ColumnsThis time around, lenders are rolling out more conservative ARM products — without the gimmicky extra-low “teaser” rates that adjust every six months, or the “pick-a-pay” and “option” features that allow borrowers to pay less than the monthly interest, only to be hit with a huge bill down the road.

    Those ARMs were hallmarks of the subprime mortgage boom that fueled the soaring rate of mortgage defaults and home foreclosures nationwide.

    “An adjustable now is basically a prime product,” said Michael Moskowitz, the president of Equity Now, a lender in New York. “There’s definitely a comeback in their popularity.”

    Bank of America, for example, had nearly twice as many ARM transactions last month as it did a year ago, according to Terry H. Francisco, a spokesman, and ARMs now account for 10 percent of all its home loans.

    Mortgage brokers and lenders say the loans most in demand are the “5/1” and “7/1,” in which the initial interest rate is fixed for the first five or seven years — after which many homeowners typically think about selling or refinancing anyway — then adjusted annually at a capped rate toward a maximum level.

    In contrast to fixed-rate loans, whose interest rates never change, ARMs start out at one rate and then adjust typically once a year at a capped rate, often two percentage points, based on changes in the interest-rate indexes to which they are tied. The adjusted rates can go up or down, and the total increase over the life of the loan is capped.

    According to Stephen Habetz, the vice president of DRB Mortgage, the lending division of Darien Rowayton Bank in Darien, Conn., the maximum caps are around 6 percent above the initial rate. Bankrate.com said the initial rate for a 5/1 ARM in the New York area averaged 4.04 percent as of Wednesday, compared with 3.74 percent nationally. For 7/1 ARMs, the average was 4.74 percent, versus 4.10 percent.

    Starting rates are usually one to one and a half percentage points below those of 30-year fixed-rate loans.

    But one catch is that getting an ARM may now be harder.

    Last summer Fannie Mae, the government buyer of home loans, said lenders must qualify borrowers on either the initial rate plus two percentage points, or on the full index rate to which the initial rate is tied, whichever is greater.

    Back in 1994, ARMs were used for around 70 percent of all home purchases, according to a study by the Federal Reserve Bank of New York released in December. By early 2009, after the onset of the financial crisis, the share had fallen to 2.3 percent, the study showed, but as of April 2010, it had climbed to about 4 percent.

    Freddie Mac, another government-buyer of loans, said in January that it expected the share of ARMs for home purchases to rise to 9 percent this year.

    Among those borrowers choosing adjustable-rate mortgages are buyers of property costing more than the $729,750 limit at which Fannie Mae and Freddie Mac will buy back loans from lenders, said Mary Boudreau, the owner of Penfield Financial, a mortgage broker in Fairfield, Conn. (Without the government buyback, fewer lenders are willing to make these “jumbo” loans, which carry interest rates one or two points above those of conventional loans. The Fannie and Freddie limit is set to drop to $625,500 in October.)

    With an ARM, the savings can be significant. Sean Bowler, a loan officer at DRB Mortgage, said someone borrowing $500,000 with a 5/1 ARM at 3.5 percent would save $42,507 in the first five years, before it adjusts, compared with a 30-year fixed-rate loan of 5.25 percent. A 7/1 ARM at 4.125 would save $38,330 over the first seven years.
  2. I think more and more people are realizing that they won't be living in their homes for 30 years, and hopefully many are also educating themselves on ways to keep more money in their pockets and less on their banks earnings statements.

    I bought my home in 2nd half of '09. Put down 60% cash and financed the rest (30 year) b/c I wanted the maximum mortgage deduction.

    I recently finished refi-ing into a 5/1 ARM. My rate dropped from 6% to 3.50% on a super jumbo.
  3. There is nothing wrong with doing ARM vs 30 yr fixed to save some coins initially as long as your time horizon makes sense.

    It's only a problem for the retards who dont know what ARM is but signs up for it and get themselves into trouble, but that's just financial darwinism at work like anything else...

    so what is so unbelievable?
  4. man never put down more than the minimal 20%(to avoid pmi) with the rates the way they are now. anything more is just crazy.
  5. The fact they're still around?
  6. No way was I going to pay 6% to a bank while they were giving me .25% on my money sitting in their vaults. They're just giving me my own money at 6% interest!!!

    I financed up to the maximum mortgage interest deduction limit, and paid the rest in cash.

    When that scumbag Obama finally gets his way and eliminates the mortgage interest deduction, I'm paying it off the next day. Until then, I'll grudgingly deal with the 3% vig the bank is stealing from me just to use the mortgage interest deduction for tax purposes.
  7. There is a fellow I know named Marvin
    His claim to fame keeps him from starvin'

    When the shit hits the fan...and its time to run.
    This is when Marvin gets the job done.

    Every 7 years is his fresh start
    and who would have thought...

    That Starvin' Marvin is a millionaire...

  8. Not sure how it makes fiscal sense to not pay cash when the savings from using the mortgage deduction will be less than the extra interest paid to the bank.
  9. Even if one cannot make 5-6% gain annually, i would still not waste that money paying down the mortgage when the rate is <6%. It's better to have that liquidity on your side you never know when the next opportunity will come.

    The minimal could use it as another down payment to buy an investment property when it presents itself, for some positive cashflow.

    Once you give it to the bank, they will never give it back to you. But if you have it, you can always put it into your mortgage anytime you want. No cash = no flexibility
  10. I still have a hard time wrapping my head around people actually buying real estate when we literally have a strategic default nation sitting in properties for years at a time paying not one cent to the banks. All the fucked up title issues, the circle jerk of attorneys stalling foreclosures, etc, etc...

    Just kind of makes the whole concept of purchasing real estate in 2010-2011, etc, etc a little bit less attractive. Not to mention the greedy local tax assessors who conveniently ignore the dwindling values in most locales...

    Anyhow, I realize this an ARM discussion, so carry on...
    #10     Mar 21, 2011