Did the subprime debacle kill the adjustable rate mortgage?

Mortgage and Lending with HomeBridge Financial, LLC NMLSR 260770

A few days ago, I wrote about the assumability feature for FHA loans. Another program feature that has not been discussed much over the past few years is the adjustable rate mortgage. With rates near all-time lows, it may not make sense for most borrowers to choose an ARM. However, if you plan on staying in your home for a short time or you need the lower rate to assist you in qualifying, then an ARM may be an option.

The subprime-loan debacle gave ARM products a bad name — primarily those that featured the "crazy first year adjustment." The first-year cap on most subprime adjustable loans was as high as 5-6%. FHA loans, on the other hand, have a more reasonable annual maximum adjustment (the cap) of 1-2%.

FHA offers a standard 1-year ARM and four "hybrid" ARM products. Hybrid ARMs offer an initial interest rate that is constant for the first three, five, seven, or 10 years. After the initial period, the interest rate will adjust annually. Below are the different interest rate cap structures for the various ARM products:

• The 1-year ARM and 3-year hybrid ARM have annual caps of one percentage point, and life-of-the-loan caps of five percentage points. (Example: If your initial interest rate were 4.00%, the highest possible interest rate would be 9.00%)

• The 5-, 7-, and 10-year hybrid ARMs have annual caps of two percentage points, and life-of-the-loan caps of six percentage points.

Acceptable index options on FHA-insured ARM loan transactions are 1) the Constant Maturity Treasury (CMT) index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); or 2) the 1-year London Interbank Offered Rate (LIBOR).

As rates continue to move off their historical lows, we must diligently review all loan possibilities, including ARMs, as viable financial avenues for our customers.


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Andres Munar
Keystone Alliance Mortgage - State College, PA
Experience The Difference

I've been offering this to many clients b/c of the reasons you stated. Since I live in a college town many homeowners are here b/c of a job and will leave within 5-7 years and it makes sense to take a lower rate for them. Other clients who have refinanced plan to upgrade into a bigger home within 5-7 years so it made sense for them to also take an ARM. If the product is explained well and not abused it can be a great solution!

Dec 20, 2010 04:30 PM #1
Marcy Moyer
Keller Williams Realty Palo Alto Probate & Trust Specialist - Palo Alto, CA

My biggest issue with ARMs for my clients is that they invariably will re-fi and get 10 years down the road and still have 30 years to go on their mortgages. The idea of moving in 5-7 years has been tainted by the current climate where not everyone can move when they want because of lost equity.

Dec 24, 2010 05:38 AM #2
Kathy Sheehan
Bay Equity, LLC 770-634-4021 - Atlanta, GA
Senior Loan Officer

The FHA ARM program is a great option for some clients depending on their situation.  I have found incoming tranferees most open to this option since they know they will only be here for a short time.


Jan 14, 2011 08:35 AM #3
Dustan Shepherd
HomeBridge Financial, LLC NMLSR 260770 - Overland Park, KS

Kathy, it is always nice to see veteran loan originators who get it. As a Neosho, Mo native it is always nice to meet up with a UT grad, go Hurricanes!

Jan 18, 2011 12:14 AM #4
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