May 4th, 2010 7:05 PM by Dan Marchiando
Plain Vanilla ARM (Adjustable Rate Mortgage) Loans are Making a Comeback
For the past year or two, for purchase loans and refinance loans, we have been doing almost exclusively 30-year fixed rate mortgages. In part this has been due to the fact that ARM loans have been price by lenders with worse rates than their fixed rate loans. But in the last few months this situation has normalized, and ARM loans once again have a rate advantage over fixed rated loans.
Interest-only payments are available with most of these ARM loans, but lenders are no longer throwing this feature in for free. Interest-only loans in most cases have slightly higher rates than non-interest-only loans. The effect of the slightly higher rate cancels out some of the lower payment advantage that interest-only loans can have. Also, lenders used to qualify borrowers on the lower interest-only payment, when computing the borrower’s monthly debt ratios, but this advantage has also been lost in the mortgage meltdown.
So why would you take an ARM loan when purchasing or refinancing your current loan? You might do it if you really needed or wanted the lower payment and rate, and knew that you would only be keeping the loan for a short period of time. Notice that I said “keep the loan,” and not “keep the property.” Some people we do purchase or refinance loans for know that they will be selling in 5 or 10 years, or know that they will be refinancing in 5 or 10 years, and opt for the ARM loans because of the savings they have. For people who don’t know what their future holds in the near-term, it makes more sense—while rates are very low—to just stick with the traditional fixed-rate mortgage loan.
These ARM loans are very basic loans—no negative amortizing loans are left. Almost all the ARM loans today are based upon the LIBOR index, which is currently about 1%; and all the ARM loans that I’m aware of have very typical 2.25% margins on them; none have prepayment penalties.
So what are rates for Conventional Conforming ARM loans like these days? Well, everybody’s situation is likely to be different, but a typical scenario ARM rate on a $417,000 purchase loan amount with excellent credit, at no more than 80% loan-to-value on a non-condo property, might look like this if locked for 30 days today (05-04-10):
30-Year Fixed rate: 4.75% interest rate, 4.88% APR
10-Year ARM rate: 4.25% interest rate, 4.00% APR
7-Year ARM rate: 4.00% interest rate, 3.69% APR
5-Year ARM rate: 3.625% interest rate, 3.47% APR
You may notice that the APR on the ARM loans is actually less than the start rate. That will take a little explaining, so that will have to be the subject of another blog posting. Stay tuned, and thanks for reading my blog. Call or email me with any questions you might have about purchase or refinance mortgages. Thanks!