That is a trick question. This is my best my cousin Vinny impression.
Fortunately one size does not fit all. They each have strengths and the final determinant is the need of the individual.
Scenario 1. Client who earns a high bonus which represents 30 to 40% of his annual gross. A pay option or hybrid arm will be the best bet for such a person. Why you ask?
Before I answer let me explain a common misconception. Most of the payments made towards your mortgage goes to service interest a very small portion of it goes to the principle. So what difference does it really make if you make a fully amortizing payment, an interest only payment or a deferred interest payment? Statistically the average mortgage is held for less than 6 years. Most of the gains that have been made in value has been from property appreciation and not from monthly payments.
Now back to my scenario, Our high earner has lower monthly payments and at the end of the year can apply his bonus towards paying down principal if he so inclined.
Scenario 2. Married young couple with 2 children. They are at the beginning of the earning cycle. If the follow the normal trends and adjust for inflation earning will increase faster than their cost of living. But today they will be spending every thing the earn to cover mortgage payments if they get a 30 year fixed at x rate.
My recommendation will be deferred interest, get some wiggle room and start to save money towards college for the 2 children. the difference in payment between the two can be as much as $600.00 a month depending on the loan amount. The government lets you write of the interest so the true cost of the money is insignificant. The $600.00 a month can be put into a fund that yields 5 or 6% and compounded over 10 years that is a lot of money.
Why do I do fixed rates? Because my customers want the product. For people who have no savings I always recommend a pay option arm.
That is why I believe Arm to be better than a fixed rate loan.
Christopher J. Onwuasoanya
1st Metropolitan Mortgage
www.bestnjloans.com
You aren't explaining why the ARM is best. Just that you prefer it. I can think of one main reason for that, they pay you more. It has nothing to do with your client. I guarantee you that your client doesn't walk in your door and say "Hey Chris, I want an ARM today." Most clients are wanting something that is more stable, the media has insured that.
The rates on ARMS aren't better right now, Option ARMS are a tool for savvy investors, not your average homeowner. Saving for college can be accomplished in much easier ways than risking your home by putting someone in an ARM product. I didn't see anything on your profile that said you were a financial planner, that could be dangerous ground to walk on.
And worse your final comments just emphasize your lack of understanding, you state you do fixed rate (yet neither of your scenarios suggest that you do), You state that you offer Option ARMS to people who have no savings (are you insane?) than you state you prefer ARMS (but with no clear cut reason why).
Chris, do yourself a favor. Explore some fixed rate options like biweekly payments, interest only and take a stronger look at the real needs of your clients. Your clients deserve more than a pat answer. And in the end you will be a better LO for it.