Wow, Brian that is great information. I did not know ARM'S outperform fixed rates since WWII. That's why is pays to have knowledgeable lenders who understand the history.

Excellent post. Thank you!

Brian- This is top notch advice.. no question you know how to properly advise your clients.  Buyers need to find an excellent mortgage broker to advise them on how to wend their way through a different financial market.    There are too many variables in today's market.. buyers need the best help out there to secure their financial plan so it makes sense in the future.

Mr. Brady - You don't disappoint do you?  As laid out here by you, I guess in some regards, I would be considered an average loan hack.  Yet, what was laid out here is simply marketing genius.  The average folk, who encompass a whole lot of people owning homes, whether or not they have a financial guru on their side or not, probably benefit little by playing the game.  The strategy you have laid out works great and makes sense with the higher echelon of borrowers, yet probably doesn't fit the other part of the equation.  That's my take and it ain't easy throwing jabs with a guy like you.

Very well written, Brian.... have you read some of Mike Mapes posts?

There are only a handful of loan officers in Active Rain I would do business with...and you are one of them....

Brian,

I liked this post very much.  You have a way of putting things that makes it easy to understand.

Thanks,

Fran

Brian - Thanks for presenting the straight scoop and telling it like it is. 

Jason,

Your analysis of the product selection demonstrates your critical thinking and immediately disqualifies you as a loan hack.  It's the critical thinking that originators need to bring to the table.

The theory works for a "average folk".  Shouldn't they model the financial decisions of the wealthy?  The only difference those two sets of borrowers have is a zero on the loan amount, payment, and amount invested each month.  I'd submit that the case is even more compelling and advantageous to "average folk".  FHA loans, "available folk" offer rate caps of 1% per year which is more protective than the 2% annual caps for conforming loans.

In the case of the $100,000 loan amount, the amount saved by the 2% rule I cite would be $2,000 annually. 

The real problem with average folk is that they are pushed into homes by the allure of easy riches.  We hold home ownership in high esteem in this country.   Now, more  than ever, it's better to wait until you have liquidity before you leap into a home purchase.

Again, you're no loan hack, Jason.   

Brian - This line is so crucial and so very key, "Now, more  than ever, it's better to wait until you have liquidity before you leap into a home purchase."  Very well put!  That, to me, solves a lot of potential problems for everybody involved.  Of note, this market will also put fingers to the fire for originators everywhere.  I love the term "Loan Hacks" and while I agree that I'm not one, there have been many coming out of the wood work over recent years.   Now, they are getting splinters.  When the bullet hits the bone, that's a blessing in disguise for consumers everywhere.  BTW, as if I had to say it, AWESOME read Mr. Brady. 

Great post Brian-

It's a shame that we need to be so polite!

I think I can come up with a few stronger terms than "Loan hack" - but I'm sure you can too.

The Mortgage process really isn't so difficult - but these fools have certainly done everything possible to make it seem that way.

See ya at the conf.

Very nice and worth waiting for.  However, as a alternative to buying the home leaving little liquidity or renting, other alternatives are to buy a lower priced home. 

Uh oh, I feel a blog coming on.  This is a discussion that has it's genisis in home pricing, not necessarily interest rates, types of loans or even . . . . .  STAY TUNED. 

Brain, You had me at the title.  I knew I did not have to go any further... I so glad I did.   Great post.

Let me reiterate, you wise souls are killing me!  Blasi, Harley, Brady, darn it.....I love the learn though, love the learn!  If you are good for people, you are good for the world...and your profession. 

I think you nailed it with.... 1- Qualify for the mortgage at 2% above the adjustable rate.  If you are selecting an ARM to "get into" the home, you should be renting.

 Most of the people in ARMs right now that are having trouble..... simply bought too much house. Keeping up with the Joneses never cost so much!!!

Looks like they will be renting soon enough,

I'll bet Lenn's post is good.   I have an idea where she's going to go with it.

Brian,

Thanks for the post. This is a great article helpful to both real estate professionals and consumers alike. I have bookmarked this and would like to use this for my buyers, with your permission.

Brian,

Sad for us brokers, I think we all should have done more homework, because you pointed out all of the right facts to help a consumer differ between the two loans, I really should have thought some more about my post.. Great job!!! But hey I tried :0)

Tom Weiss

Brian...I have only read a part of this post and I claim plagiarism...just kidding.  You have a much better way of presenting than I do.  That is something I need to work on, "flare".  I will get back to reading this later, but I wanted to throw in an "Amen".

This is really excellent. 

I have always preferred the ARM products.  I run amortization schedules for buyers showing the interest saved on the ARM over the first few years and there is rarely a justification to pay the premium for the old 30 year fixed that their father said they should take. 

The info on the invested yield curve, margins and the historical picture is very interesting.

This post, although it will be seen by the public is being read here by mortgage and real estate practitioners and the depth is welcomed. 

You broke Lenn's Law by mentioning the "R" word. 

Brian... boring, boring, boring.....  lol  Seriously...  no story involved, but you baisically hit the nail on the head because. I mentioned this in Rich Jacobson's contest post.... basically looking at the yield curve, the cycles, and the margins, not to exceed 3%. You also mentioned qualifying clients 2% ABOVE THE RATE.... in which do you remember, that this use to be a requirement in the early to mid 90's?  Gee, and there weren't as many problems. But investors relaxed on this.....  do you know FHA has raised this standard... I think it was back in 2002. Times flys....   but you qualify at the 2nd year rate and as you mentioned FHA's caps are 1% per year.

Lastly, you said that many consumers are just fearful ... that so many think that fixed rates are the safest. You did mention that the consumer should seek someone with financial planning training....  great advice, The only thing that I think your blog lacked was mentioning that the loan officer, in order to advise correctly, should ask the consumer about their goals. This needs to be factor into the equation in order to give proper and good advice. Just my .02.

Other than that..... excellent...  you basically covered everything and this was easy to understand.

Brian...2 more things that I wanted to mention....

1st off...from talking to you in the past, I know that you know that you need to ask the clients goals...  maybe you just felt that you wanted to touch upon this. You bring up strong points.

2nd... I meant to say that you brought up the fact about investing these savings. Excellent point that is not touched upon... if you don't do this, the only thing that you can gain from the arm are bigger tvs, nicer cars, and trips. But you can't cash these in if you get in trouble. 

Brian - THANK YOU

Every home owner needs to read this. They throw away thousands of dollars every single year because they believe that a 30 year fixed rate loan is their best and only option.

True mortgage professionals know how to find a client's risk tolerance, understand how to help them achieve their financial goals, and can explain loan products properly.

I'm very happy to have you on "our" team as a loan professional!!

Galel

Brian... I was telling someone else in another comment that I was laughed at several loan officers for putting my clients into the 7 yr balloon back in '98 to '99. DO you know what the spread was when comparing the 30 yr fixed rate and the arm/balloon. 1.125% to 7/8%.....  that is huge, especially on a 300k home... and just for the fact, the ones that I did had 80% to 90% LTV's....   I made so many people happy.  Just a fyi on how those professionals seek the program that has the best value at that time. And at the same, knowing that client's goals.

I was laughed at several loan officers for putting my clients into the 7 yr balloon back in '98 to '99

That spread was HUGE back them.  I probably wrote $2-3 million  in 5 and 7 year balloons in 99 and 2000.  Of course, that was a lot of money back then; it represented 20-30 houses.

and when I told so many on that difference, you should have seen their eyes light up. But you know what's sad, they were lazy in learning the difference and how a balloon worked... one main reason is because it takes another 15 minutes to explain the ins and outs....  lol  Bottom line, these same loan officers went back to selling the 30 yr fixed rates....  

So, you and I were both on the same page back then and still are.  

I have bookmarked this and would like to use this for my buyers, with your permission.

Anything I write may be used, with my full permission, by anyone.  Please publish with author credit and a website:

www.Brian-Brady.com

So, you and I were both on the same page back then and still are.

and probably will be ten years from now. 

Understand yourself and your own spending habits before selecting a mortgage ... simple yet brilliant!

this was really good and very good read.  I am sorry i missed it earlier.

Michael Mapes

Brian.... I mean, Mr. Brady.... you out did yourself here. Very easy to read and to understand from a consumer's perspective. Congrats on 2nd place...

Congratulations, Brian!  :o)

Brian... Congrats on 2nd place, Great post!

Congratulations!

Brian,

Congrats to you, I think you did great, and you made it very tough competition for us, but it was fun!!

Tom Weiss

Brian, Excellent post!  You really did a spectacular job!  Congratulations on the honors!  I look forward to reading more of your stuff!

Brian,  Great post.  Very informative.  i will be bookmarking this post for references.  Thank alot.

As usual, excellent advice and information.  Hopefully with the sub-prime bust, many of the loan hacks have found new jobs in other fields.

Brian, This should be mandatory reading for every REALTOR, Buyer and Seller on the planet. No reason for Loan officers to read it. if they don't already know it, they have chosen to ignore it and should not be dealt with in the first place. Congratulations Brian, this is a winning post!

I got a 7 year ARM a few years ago because it was the lowest rate available (in the 4's). We selected an ARM based on how long we thought we might remain in the house. When the time is up, we will refi or sell. At any rate (no pun intended), we've saved oodles of money over the past few years with our low, low rate. Even if we refi to a higher rate, the money we will have saved over the 7 years is still money we have saved, that benefit doesn't go away! I've had so many buyers say to me "I must have a fixed rate" when they only plan to be in the house for 4-5 years. I tell them to talk with their lender - fixed is not always better - look at the WHOLE PICTURE of your financial situation and then decide. Thanks for a great post.

Congratulations.

Brian, I am now trying to sell a home for a client who got slammed by a loan hack just two years ago. 2 year interest only at 7.5, LIBOR index, after 2 years payments can increase, and did, to interest rate of 10.25, can increase each 6 months by 1% to a max of 14.5%. I guess loan hacks were at work here.

More importantly, after reading this article, I re-read the ARMs dealer post. You have a broken link regarding tempering reverse amortization. This sounds like an important concept, maybe you could adress it in a future post.

Brian, congratulations on your second place finish.  With the number of very good entries this was not something easy to accomplish.

Brian,

I share in your opinion that many loan officers play up to the fear that people have and thus through there clients into a cycle where they are refinancing from the ARM, to the Option ARM to the Fixed. One thing I have noticed has not received tons of attention and I wonder if you see this coming as well is how "trendy" it was to sell the Option ARM and now that it has such a negative image that it is now "trendy" to sell the Home Accelerator plan.  I see this mortgage and the software that come along with it as the next loan to cause mass problems. Any thoughts?

One thing I have noticed has not received tons of attention and I wonder if you see this coming as well is how "trendy" it was to sell the Option ARM and now that it has such a negative image that it is now "trendy" to sell the Home Accelerator plan.  I see this mortgage and the software that come along with it as the next loan to cause mass problems. Any thoughts?

I don't think accelerating debt in itself is a problem...UNLESS..you're doing it at the expense of liquidity.  The problems with accelerating the amortization:

1- It may limit the deductibility of interest on any cash out refinances you do in the future.

2- It strains liquidity.

Better to maximize home indebtedness, use an interest-only or neg am loan (when appropriate) and invest the difference in a side fund.

Cash is King...then, now, and in the future. 

Brian: Just wanted to stop by and say congratulations. I wrote a blog yesterday that mentioned why I think this blog should be an ActiveRain Hall of Fame post (if there is such a thing) There was never a doubt in my mind you would be one of the winners...this is one of the best I've seen.

ARM'S outperformed fixed rates since WWII.

No, that's not the claim.

Read it again. "Any given five year period."  Not any given period.

And not just any ARM, but the one-year ARM.

And not against fixed rates, but only against the 30-year fixed.

Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.

Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.

No, I think we'd like to hear the rationale for your prognostication about rates, Robert. 

Excellent post, Brian. You are a master at this stuff! See you in SFO!

Jeff

My favorite answer when my buyers ask me my opinion of an arm is "it depends." No 2 borrowers are the same.

Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.

No, I think we'd like to hear the rationale for your prognostication about rates, Robert.
 

Hi Brian.

Mortgage Rates Decline but One Year ARM Rates Go Off the Chart 

I guess technically I was wrong; It only took 2 months, not 24.

One step ahead of you, Robert.  Written in response to that article last week

It's temporary 

One step ahead of you, Robert.  Written in response to that article last week

It's temporary