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Author Topic: Adjustable Rate Mortgage - ARM Good or Bad?  (Read 2133 times)

Offline pianoman9701

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Adjustable Rate Mortgage - ARM Good or Bad?
« on: March 31, 2022, 02:21:28 PM »
Historically, ARMs have been looked upon as negative because of unscrupulous lenders who didn't give their borrowers the full story or downplayed the "adjustable" part of the loan. But, they have their place, especially for those who don't plan to stay in the house for which they're getting the loan. Military, employees of large national or international companies, or people planning on retiring soon and moving elsewhere could all potentially benefit from the normally lower starting interest rate of an ARM as compared to a fixed-rate mortgage. Here are some important things to consider when thinking about a new mortgage. In addition, the following link will take you to the Fed consumer handbook on ARMs. Feel free to contact me for more info. https://files.consumerfinance.gov/f/201204_CFPB_ARMs-brochure.pdf
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Offline optic2

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #1 on: April 01, 2022, 06:49:39 AM »
No
No
No
No

Adjustable rate mortgages are bad 100% of the time. You have absolutely no guarantee that the bank will refinance at a lower interest rate in the future, just ask millions of people that it happened to in 2009. Just because someone is planning on moving in the future doesn't mean that they actually will. Military, maybe you get orders to stay where you are and then the bank won't let you refinance, congratulations, you're screwed. About to retire and plan on moving to Montana, then you have a massive heart attack and need a bunch of rehab, now you aren't moving. Congratulations, you either get to lose your home or find some way to afford your new astronomically high mortagage.

Look, Piano Man, I get it, you want to make a couple bucks and feel you can help a couple people. But no, no, no, no. no. Adjustable rate mortgages are like saying "hey, let's do a little cocaine, it will be fun right!". They are ALWAYS BAD, ALWAYS.

Offline pianoman9701

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #2 on: April 01, 2022, 08:12:22 AM »
That’s just not true. And claiming I would post about something that is never good just to make a few bucks is BS. You don’t know me and you don’t know what you’re talking about.
"Restricting the rights of law-abiding citizens based on the actions of criminals and madmen will have no positive effect on the future acts of criminals and madmen. It will only serve to reduce individual rights and the very security of our republic." - Pianoman

Offline pianoman9701

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #3 on: April 01, 2022, 08:34:46 AM »
Let me give you a current example. Interest rates have gone up drastically in the last two months. I have a borrower, a HuntWA member, who's going to buy a house in OR and only live in it for three years. An ARM may save him 1% and not change rate until the mortgage is at 5 years. Let's say that the fixed rate is 5% on a $500,000 mortgage. In three years, he would pay $39,476.00 in interest. If a 5/1 ARM (rate doesn't change for 5 years) had a rate of 4%, his interest would be $31,431.00. He would save over $8,000 in just three years.

I'm in no way recommending ARMs for everyone. But you need to keep in mind that those who are planning on turning that real estate in less than the term of the rate change can save thousands. In this case, whether the value of the house stays the same or goes up or down, he's still getting rid of it in three years. This is also a beneficial option for people flipping homes.
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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #4 on: April 01, 2022, 08:35:05 AM »
I don't know if adjustable rates are good or bad. But the Feds are already saying they are going to raise rates several times in the near future.

Would this mean that once you get the loan your rates will automatically go up everytime the rates are increased?

If this is the case. Would it be a poor decision to get an adjustable rate mortgage right now. Or is there more to the picture?

Just curious, as I know little to nothing about this stuff.

Offline pianoman9701

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #5 on: April 01, 2022, 08:52:51 AM »
I don't know if adjustable rates are good or bad. But the Feds are already saying they are going to raise rates several times in the near future.

Would this mean that once you get the loan your rates will automatically go up everytime the rates are increased?

If this is the case. Would it be a poor decision to get an adjustable rate mortgage right now. Or is there more to the picture?

Just curious, as I know little to nothing about this stuff.

That's a great question. First off, I wouldn't recommend an ARM for someone who plans on keeping their home forever. If they have impeccable finances and are shrewd investors, they might decide to anyway. It's my job to give a borrower all the right options for their situation. I recommend ARMs for a very small percentage of my business, maybe 5% if that.

So, in answer to your question, ARM rates are normally fixed for 3, 5, 7, or 10 years. So let's say you get a 5/1 ARM (fixed rate for 5 years and the rate can then change each year thereafter) with a 5/2/5 cap (your first increase can be from 0-5%, increase up to 2% per year thereafter for a maximum total increase of 5%). As rates continue to go up this year, let's say 3% more over all, your ARM still won't change rate for five years.

Some lenders will tell you that if rates decrease, your ARM rate will, as well. This is extremely rare. ARM rates almost never decrease. They normally either stay the same or increase. I hope this answered your question.
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Offline Stein

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #6 on: April 01, 2022, 09:31:00 AM »
The potential reward is a one time benefit of $8k before taxes, probably closer to $5k after deducting the interest.  The potential risk is you could be hit with a $25,000 a year increase in the interest payments for the life of the loan if you have to or want to stay - another $2k+ a month on top of the original payment.  It's always seemed to me like the borrower is assuming a ton of risk for a real reward of well under a percent.  Lots and lots of things can go wrong, it's awfully hard to predict 3-5 years into the future:

You don't move, change your mind, circumstances change
You can't move, jobs, family or circumstances change
You or your spouse lose your job right at the wrong time
Divorce, illness, injury
Rates go up enough to prevent a move or refinance
Home prices go down and you can't sell or are upside down
You want to keep the house as an investment rental
Probably 100 other things


Offline pianoman9701

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #7 on: April 01, 2022, 09:37:32 AM »
The potential reward is a one time benefit of $8k before taxes, probably closer to $5k after deducting the interest.  The potential risk is you could be hit with a $25,000 a year increase in the interest payments for the life of the loan if you have to or want to stay - another $2k+ a month on top of the original payment.  It's always seemed to me like the borrower is assuming a ton of risk for a real reward of well under a percent.  Lots and lots of things can go wrong, it's awfully hard to predict 3-5 years into the future:

You don't move, change your mind, circumstances change
You can't move, jobs, family or circumstances change
You or your spouse lose your job right at the wrong time
Divorce, illness, injury
Rates go up enough to prevent a move or refinance
Home prices go down and you can't sell or are upside down
You want to keep the house as an investment rental
Probably 100 other things

There are all kinds of risks associated with getting any mortgage or buying any house. As I've said, I don't recommend ARMs for the vast majority of my borrowers. But there are circumstances where they make sense. They've also changed quite a bit since the great recession, due to changes in mortgage law meant to protect borrowers from predatory lending practices. There were people getting ARMs who shouldn't have qualified for any home. There were people getting loans for 125% of their value. These practices are no longer allowed.
"Restricting the rights of law-abiding citizens based on the actions of criminals and madmen will have no positive effect on the future acts of criminals and madmen. It will only serve to reduce individual rights and the very security of our republic." - Pianoman

Offline ctwiggs1

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #8 on: April 01, 2022, 10:32:30 AM »
The potential reward is a one time benefit of $8k before taxes, probably closer to $5k after deducting the interest.  The potential risk is you could be hit with a $25,000 a year increase in the interest payments for the life of the loan if you have to or want to stay - another $2k+ a month on top of the original payment.  It's always seemed to me like the borrower is assuming a ton of risk for a real reward of well under a percent.  Lots and lots of things can go wrong, it's awfully hard to predict 3-5 years into the future:

You don't move, change your mind, circumstances change
You can't move, jobs, family or circumstances change
You or your spouse lose your job right at the wrong time
Divorce, illness, injury
Rates go up enough to prevent a move or refinance
Home prices go down and you can't sell or are upside down
You want to keep the house as an investment rental
Probably 100 other things

 :yeah: :yeah: :yeah: :yeah: :yeah: :yeah: :yeah: :yeah: :yeah:
Unless the bank will guarantee an opportunity to refi into conventional no matter the circumstances, I'd avoid an ARM 100% of the time.

My first house was $200,000.  I couldn't believe it.  I walked in EASILY with 25k in equity.  I got deployment orders a few months later and by time I got back my house was worth $130,000 (and it probably wouldn't have sold for that).

Had I been on an ARM (like many were at the time), payment shock could have absolutely crushed me with no way out of the house.  Because I was on a conventional mortgage, my payment stayed relatively static and I just had to sit and wait it out.

In the example of someone buying a house for only three years, just remember:  three years ago was before the lockdowns, before the Russia/Ukraine war, before Biden, before we had to "take a class to buy an AR-15", before our first trans HHS sec, etc.  a LOT happens in 3 years at a macro level. 

Y'all can call it "interest savings" - I'll just suck it up and call it an insurance policy.

Offline pianoman9701

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #9 on: April 01, 2022, 10:54:15 AM »
The potential reward is a one time benefit of $8k before taxes, probably closer to $5k after deducting the interest.  The potential risk is you could be hit with a $25,000 a year increase in the interest payments for the life of the loan if you have to or want to stay - another $2k+ a month on top of the original payment.  It's always seemed to me like the borrower is assuming a ton of risk for a real reward of well under a percent.  Lots and lots of things can go wrong, it's awfully hard to predict 3-5 years into the future:

You don't move, change your mind, circumstances change
You can't move, jobs, family or circumstances change
You or your spouse lose your job right at the wrong time
Divorce, illness, injury
Rates go up enough to prevent a move or refinance
Home prices go down and you can't sell or are upside down
You want to keep the house as an investment rental
Probably 100 other things

 :yeah: :yeah: :yeah: :yeah: :yeah: :yeah: :yeah: :yeah: :yeah:
Unless the bank will guarantee an opportunity to refi into conventional no matter the circumstances, I'd avoid an ARM 100% of the time.

My first house was $200,000.  I couldn't believe it.  I walked in EASILY with 25k in equity.  I got deployment orders a few months later and by time I got back my house was worth $130,000 (and it probably wouldn't have sold for that).

Had I been on an ARM (like many were at the time), payment shock could have absolutely crushed me with no way out of the house.  Because I was on a conventional mortgage, my payment stayed relatively static and I just had to sit and wait it out.

In the example of someone buying a house for only three years, just remember:  three years ago was before the lockdowns, before the Russia/Ukraine war, before Biden, before we had to "take a class to buy an AR-15", before our first trans HHS sec, etc.  a LOT happens in 3 years at a macro level. 

Y'all can call it "interest savings" - I'll just suck it up and call it an insurance policy.

Did I ever suggest an ARM for your loan, Curtis? You know why I didn't? Because it wasn't a good option for you, like most of my borrowers. Did you feel like I was taking the best care of you that I could or did you feel like I was only in it for me, as the first respondent to my post implied?

Look folks, there are many different mortgage options for many different situations. My job is to educate the prospective borrower on the options which most closely apply to their individual needs. I'm not advising anyone to do something they don't need or want to do. But I do want to make sure you all understand the different kind of loans available and that's all I'm doing here.
"Restricting the rights of law-abiding citizens based on the actions of criminals and madmen will have no positive effect on the future acts of criminals and madmen. It will only serve to reduce individual rights and the very security of our republic." - Pianoman

Offline ctwiggs1

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #10 on: April 01, 2022, 11:02:54 AM »
I never said you did anything wrong with my mortgage.  I walked in asking for two options, you gave them to me, I selected one and we closed the deal.  I'm very happy with the outcome.

You posted something on a public forum.  Something that has a long, distinctly negative history.  In the handout flyer you posted, there are several warnings about payment shock.

Did you expect everyone to respond with positivity here?

Offline pianoman9701

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Re: Adjustable Rate Mortgage - ARM Good or Bad?
« Reply #11 on: April 01, 2022, 11:12:00 AM »
I never said you did anything wrong with my mortgage.  I walked in asking for two options, you gave them to me, I selected one and we closed the deal.  I'm very happy with the outcome.

You posted something on a public forum.  Something that has a long, distinctly negative history.  In the handout flyer you posted, there are several warnings about payment shock.

Did you expect everyone to respond with positivity here?

No, but I also didn't expect to be accused of only looking out for me at the expense of the borrower (you didn't do that). A couple have stated that an ARM is never a good option. If that were true then they wouldn't be allowed. In a very many cases, this is not the right option for most and I've stated that clearly. There are places where it is right and there are safeguards now in place that weren't there in 2008 to help protect the borrower. I'm only trying to make people aware of what's out there.  :dunno:
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