Adjustable rate mortgages

[StarraeAday1]

With the current high interest rates, would you take an ARM knowing that you can refinance as soon as things come down a bit? I've always thought they were a dumb idea, but now that I'm going to be shopping soon and I'm potentially looking at 7-8%+ then I'm wondering if circumstances dictate that maybe it's not such a bad idea.

[ForwardLooking]

I think you need to remember that today's rates are still a bargin compared to the common 12-17% rates of the 80's and 9-10% rates of the early 90's.  My first mortgage I ever signed was 11%.  Today's interest rates are not "high" as you stated in your question and could still go higher.  I would not let today's interest rate be a deciding factor on if you go with a Fixed rate or Adjustable rate mortgage.  You also should assume that you will not be able to refinance later because life happens and you may not be able to for some reason or another.

Having said that, ARMs are complex and each ARM offering has unique and different terms.  You run a real risk of negative amatorization if interest hikes exceed your interest rate caps.  You need to understand the terms of the ARM before you agree to it and you need to have a contengency plan to counter any potential rate increses.  If you plan on only paying the scheduled monthly payment, I would avoid agreeing to an ARM.

If however, you have the ability to save and invest (in some vehicle that is fairly liquid), or pay extra towards the principal each month, ARMs can work out as you will be able to mitigate the risk by throwing money at the problem if you have to.  Also, by paying down extra principal with the ARM, you will probably lower your monthly payment obligation at the end of each adjustment period when then loan is automatically recast.  With ARMs, extra payments usually just result in lower future payment obligations over the life of the loan -- compared to a Fixed rate where extra payments just shorten the term of the loan.

[markbeiser]

Yeap, lotta people got caught out in 2007 when they found themselves under water and unable to refinance out of their ARM...
Having a contengency plan is a must.

[mystro9876]

Few things here

1) saying rates were this high in the 80-90s doesn't counter the fact the cost of living is astronomically higher now...as it relates to home prices versus median wages.  It's really an apples and oranges comparison 

2) an ARM loan isn't as attractive as it usually is in this current market environment due to the inverted yield curve.  Essentially short term treasury rates (2 yr) are HIGHER than longer term rates (20-30 yr).  Meaning the front end of the ARM which is dictated by short term rates doesn't garner much savings.  Historically you'd have 2-5yr rates hovering around 1%  and 20-30yr rates at around 3%.  Currently they are both hovering around 5%.

3) if monthly payment size is the issue, the best thing to do is 15yr mortgage vs 30, Interest only (I don't recommend this unless your disciplined enough to allocate additional funds to the principal), or just wait it out. 

[babbles]

I did the adjustable thing once back in 2007 and it end up being a near disaster, it kept adjusting upwards every 6 months, if my wife weren't active duty Army at the time, I would have walked away, instead I had to stick it out through the housing crash while others did walk away, my home in Atlanta was so far underwater, and my payments did increase reasonably I must say

I stupidly ended up with threee mortgages but weathered the storm till the values came back in about 2016 or so, glad I coudn't walk away!

[rhonda28334]

Are there any mortgages you could recommend with low money down. My scores are 786 787 and 769. 

[Horseshoez]

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@rhonda28334 wrote:

Are there any mortgages you could recommend with low money down. My scores are 786 787 and 769. 

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NFCU if you're qualified to join.

[ShanetheMortgageMan]

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@rhonda28334 wrote:

Are there any mortgages you could recommend with low money down. My scores are 786 787 and 769. 

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If you aren't planning on financing more than $766,550 then both Fannie Mae and Freddie Mac financing allow you to purchase with just a 3% down payment for first time homebuyers (haven't owned a home in the last 3 years) or for non-first time homebuyers if your income is no more than 80% of the area median income.  

There is also potential down payment assistance options to help cover that down payment.

[Citylights18]

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@mystro9876 wrote:

Few things here

1) saying rates were this high in the 80-90s doesn't counter the fact the cost of living is astronomically higher now...as it relates to home prices versus median wages.  It's really an apples and oranges comparison 

2) an ARM loan isn't as attractive as it usually is in this current market environment due to the inverted yield curve.  Essentially short term treasury rates (2 yr) are HIGHER than longer term rates (20-30 yr).  Meaning the front end of the ARM which is dictated by short term rates doesn't garner much savings.  Historically you'd have 2-5yr rates hovering around 1%  and 20-30yr rates at around 3%.  Currently they are both hovering around 5%. 

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This. That 8.0% 30 year mortgage rate of Oct 2023 is probably as high as what it will be in this cycle. The government has too much debt to raise the discount rate much higher than the 5.5% it currently sits at. Much of that debt is owed by bond holders which if you give them increased yield it begins to have a stimulative effect.

I know NFCU is advertising 5/5 ARMs for 5.67%. However if you can get that rate for 30 years even better. Signature FCU as of today is offering a 30 year rate of 5.625% with 2 points as of today. I would go with the 30 year rate if you can find it, for well qualified buyers. A well qualified buyer used to mean a 720+ credit score applicant but that considered by some lenders today to be not a high enough threshold.

ARMs can be okay in some situations. I put a 3/1 ARM on a condo but it wasn't a higher priced property. I relocked it for 2.34% for an additional 3 years before the rate hikes. Now its planning to reset to 4.34% but its only going to cost me an additional $200 a month. That was a risk I knew I was taking when I got the product but I was confident enought I could ride it out. One more year at 4.34% and then it could go to 6.34% IF rates are still up so high. Then does it make as much sense to just unload the property at that point?

[Citylights18]

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@ShanetheMortgageMan wrote:

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@rhonda28334 wrote:

Are there any mortgages you could recommend with low money down. My scores are 786 787 and 769. 

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If you aren't planning on financing more than $766,550 then both Fannie Mae and Freddie Mac financing allow you to purchase with just a 3% down payment for first time homebuyers (haven't owned a home in the last 3 years) or for non-first time homebuyers if your income is no more than 80% of the area median income.  

There is also potential down payment assistance options to help cover that down payment.

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One of the things I had wished I had done when I bought my first property was spend more time on researching out the down payment programs. 

Before buying one should be as financially prepared as possible.