Should we go with the credit union? Any Experience?

[Anonymous]

Hello, 

My husband and I are very close to buying a home. We are both members of NCSECU and want to go through them for the loan. They have a 100% financing option, the only issue is that it is a 5/1 arm loan. I have concerns about this type of loan as the interest rate can increase up to 2% every 5 years, which caps at 10% throughout the life of the loan. The perks of this loan are no down payments and no PMI. As first time home buyers with credit in the low to mid 600's, this looks extremely appealing (outside of the arm). 

Tell me your experiences with NCSECU loans/advice on ARM loans. 

[Dalmus]

You' ve pretty much hit on the main reason somebody would give you any negative feedback on taking out an ARM.

Generally, an ARM is only good if you're planning on NOT staying in the home for a longer period of time, or expect to be able to refinance before the initial rate term ends.

Do the math...  If you are going to stay in the home for more than five years, figure out what the payment would be IF interest rate went up by 2%.   Hopefully your credit score will increase, and you'll have the option to refinance before that time.

[Anonymous]

THank you for your reply! More than likely, we would like to stay 10+ years. The NCSECU loan allows us to buy a larger home to "grow into" while still being able to fix credit and gain equity. Is refininancing within the first 5 years normal? It is financially smart? Obviously I am very new to this, so please excuse my entry level questions. I appreciate the help! 

[Dalmus]

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@Anonymous wrote:

THank you for your reply! More than likely, we would like to stay 10+ years. The NCSECU loan allows us to buy a larger home to "grow into" while still being able to fix credit and gain equity. Is refininancing within the first 5 years normal? It is financially smart? Obviously I am very new to this, so please excuse my entry level questions. I appreciate the help! 

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 There are much more knowledgeable people who will be by to comment, I'm sure.  My two cents is that unless one has a sizeable emergency fund and a stable job, its generally not a good idea to stretch yourself too much for a mortgage.  But that's just my opinion.  If the larger home you can grow into isn't stressing your bottom line, go for it. 

 Refinancing before the end of an ARM term is not unusual.  There's no financial downside to refinancing out of an ARM if interest rates are trending up (which they are currently).  On the other hand, you obviously wouldn't want to have an ARM at 3.1% and then refinance into a fixed rate of 3.9%.  But the way you you described the cap being 10%, I'd venture to guess that with good credit in a few years, a fixed rate will be lower than what your ARM has adjusted to.  Some lenders may charge you a pre-payment penalty, though, so understanding your loan documents is very important.

 Again, I'll defer to the professionals here.  But if you are looking at the ARM because you don't have enough for a down payment and PMI, I'd be very careful on how much house you purchase.  If you had a down payment and just want more house, that's a much acceptable to my brain.    I know too many people who are "house poor."  They have big gorgeous houses, but can't afford to furnish all the rooms and have no "fun" money.

 Not saying you're one of those, just saying in general. 

[Anonymous]

Thanks again! It is more of "we have a down payment but dont want to pay the PMI, if we dont have to." And if we could go with NCSECU and use that down payment for other moving expenses, that would be great! Obviously, if we had more of a down payment and better credit, we could have a loan that didnt require PMI and that may be what we work towards. I would just hate to spend another year renting, when we could buy right now. Our credit isnt terrible, but we could surely improve our scores and get better rates. I guess the my hesitancy comes in taking the ARM risk and maybe not being able to re-finance and being stuck with a mortgage that may be too high. 

P.S- your experitise is extremely helpful!

[Dalmus]

Gotcha.  My wife and I are in the same boat...  We have a sizable down payment, but definitely not 20% of the cost of the range that would be a decent upgrade.  We're not going to be ready for a year or two (I have a Prosper loan I want to have paid off and gone before we apply).  I'm looking at NFCU for the same reason...  They offer a fixed rate mortgage with 5% down and no PMI.  For us, that's a difference between looking in the $200K range and looking in the $300K range.

[NC_Mtg_Loaner]

As a licensed mortgage loan originator in NC I compete against NC SECU on occassion.   

I understand the 'allure' of that 100% ARM they offer and often lose business to them on many occassions but I certainly don't lose much sleep over it either.   Of course I have refinanced a few of those folks into a low fixed rate a few years later and not long after they've purchased and saved more money afterwards.   

However, the issue really is scary here if you ask me. 

Eventhough "the media" has been telling us that higher rates are "on the way" this is something we've known ever since the Federal Reserve reduced their rate to zero in 2006 as a result of the pending financial & housing crisis they saw coming in 2008.   While the FED talked about raising rates long before Janet Yellen took over the reigns from Bernanke in 2014, they've only managed 5 rate hikes since they finally began doing so in December of 2015. While these hikes haven't impacted current mortgage rates, it's likely that future rate hikes ultimately (and eventually) will.   

When this happens, a 1% spike in your mortgage's interest rate can wipeout any beneficial savings you receive today by not needing any money down or not having to pay any MI.   For example, let's take a $100k loan amortized at 4.625%.   5 years from now your principle balance will be $91,170.   A 1% increase means you'll pay $911 interest and a 2% increase means $1822 which means $75-$150 monthly increase respectively.   

Even looking to refinance to a fixed rate 5 years from now means you are more likely to be refinancing lower principle sure, but the fixed rates will be higher than they are today which will cost you more money in the future still. 

So taking out an ARM now means that you are risking that rates won't be higher if you think you'll be able to adjust lower or at a similar level as today's fixed rates. 

Lastly, the "adjustable rate" that NC SECU offers is similar (if not higher) to the "fixed rate" of other lenders today.    What's worse is that you don't have any equity in the property since no downpayment was made or required.  Therefore, five years from now, unless you've received greater than normal market appreciation, or you've paid extra principle on your loan, your going to be challenged in having sufficient equity in your current home and its loan in order to conduct a simple refinance where you are able to get away from that ARM and finally save money or lock that fixed rate. 

[Anonymous]

I've owned my home since I was 18 (paid cash for my first one after working my rear off for 3 years) and never had a mortgage.

In 25 years, almost everyone I know who got an ARM loan went through foreclosure within 2 years of the final reset because they lived high on the hog when they should have been fixing their credit scores and saving real money.  I know 4 couples who made out with the ARM because the day after they closed on their home, they didn't run to IKEA and Home Depot to max out credit cards.  Instead, they lived with Goodwill sofas and dining tables, they ate all their food from ALDI, they never turned on cable TV and they didn't have fancy 84" OLED TVs for the length of the ARM.  All 4 couples basically lived in "poverty mode" because they knew an ARM loan is either for folks who expect to sell quickly (or pay off a loan quickly) or for people who are too poor to get a great fixed rate loan.  So they lived like they were poor so they'd be able to get a loan suited for 30 years of homeownership.

If you get an ARM and then immediately go out to spend $10,000 at Lowes and $5,000 at Best Buy and $25,000 on a new car, you're going to face some serious serious pain if and when mortgage lending tightens.

Now, if you can plan to live by the thinnest budget while boosting your FICO scores into the 750s and saving up $40,000-$60,000 in cash over 5 years, it's a feasible answer to a mortgage.

Remember: getting the keys to a house doesn't make you a "home owner", it makes you a "home borrower".  The only time you become a "home owner" is the day you actually have $1 of equity minimum in that home.  If you're upside down on a mortgage, you are not a home owner.

[Anonymous]

Excellent advice!

[Anonymous]

Thank you! Very good perspective!