http://wealthcreationteam.ning.com/video/travis-mortgage-and-financial-3
After pricing a few deals for clients this afternoon and where mortgage rates landed after a nice rally today I feel that considering an adjustable rate mortgage for a moderate range period like 5 to 7 years is making a lot of sense again. If you look at a 5-yr ARM rate at 3.75% (APR 3.97%), the gap is quite impressive between a 30-yr and 5-yr again and definitely worth considering if you feel you will only have the mortgage for 5 or 6 years.
Remember, conforming ARM's are not the evil child of lending that the media has led us to believe in recent months. The sub-prime ARM's that are no longer available were the ones that had huge margins at the adjustment period and pre-payment penalties. For example, on a conforming 5-yr ARM, at the end of the 5th year, the new interest rate for the next 12 months (year 6) is determined by adding the margin (2.25%) with the index, which the 12-month LIBOR is commonly used.
Today, for my clients that have their 5 and 3 year ARM's adjusting next month, we simply have to add 2.25% and the current LIBOR which is at 1.456% for a new rate of 3.71% for the next 12 months. Not the shock and awe most people think or assume. Obviously when the Feds start raising the Fed Funds Rate again then the LIBOR will start climbing but I am talking real time numbers as an example.
So as long as an adjustable rate mortgage is properly managed by your mortgage planner, there should be no surprises before the adjustment period would happen. Understanding how the ARM works takes away all the mystery and surprises of this type of financing and the people that understand them enjoy the thousands saved over time. On a $300,000 mortgage, a difference in 1.25% rate over 5 years is $18,750, not a small number to shrug at.
If you look at a 5-yr Interest Only ARM on an investment property with 25% down, the rate was only 4.625% today (APR 4.814%). If you were to buy an investment property for $220,000 with a loan amount of $165k, (75% loan to value) their monthly interest payment is only $635! Add in taxes and insurance you are probably looking at a total payment of $875, which seems like an easy cash flow situation on day 1 of renting! I think it is safe to say we will see some appreciation in the next 5 years to negate the interest only payment if you are concerned about trapping a principal payment into your rental.
If you cringe at thought of having a 5-yr ARM because it is too short of a period, ask yourself this question, how many mortgages have you had before and what was the length of time you held each mortgage. More often than not when I have people tell me they will keep their mortgage forever, a quick check of their credit report begs to differ as I see a new mortgage every 4 or 5 years because of their use of equity management, investment opportunities, remodels, college funding, a new home, job transfer, etc. You get the idea.
I don't think we should all run out and get an adjustable rate mortgage but I certainly feel they have there place in the financing world if managed properly and you are quite certain you will be keeping your current home more than 2 years and less than 5 (refinance) or simply you are going to take advantage of the great rates and low home prices to be able to sell in 5 years or so when the market is growing and inflation has grown, looking to turn a profit.
I didn't touch on them but if a 5-year makes you nervous there are 7 and 10-yr ARM's as well. There is no sense in paying a higher premium (rate) to get a long term fixed mortgage for 30-years if you aren't going to use the benefit.
Be Blessed!
Travis
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