You know, as a licensed professional realtor, strictly adhering to the Realtor Code of Ethics, and complying fully with the Fair Housing Act, I have to say that I am getting REALLY tired of all this relentless prejudice being displayed constantly on the part of the Lending Industry towards Legs. You never once hear about an Adjustable Leg, or a Variable Leg. No! It's always ARMs! Come on! It's high time for you guys to cease with the anatomical biases! Equal Rights for Legs!

LOL...Rich Rich...

Thanks for posting a good one Brian! I'm always open to helping out people that have questions about ARMS...

Scott

Oh, I rememmber the Less Extra Gain loan, we call those LEGs or neg-am loans

Brian - Although most of this is beyond me - it highlights the importance of working with a lender you can trust.  And you have a great reputation!

Wow-

You had my attention with one of the first lines:

"that Wall Street gurus are wrong over 60% of the time with their interest rate projections"

It takes some serious effort to be wrong that much!  If you had no inside info and you just guessed you'd have a 50-50 chance!

It's like they're TRYING to be wrong!!!

(yes,a bit of an over simplification but you know what I mean!)

It does seem like they purposefully try to be incorrect.  Markets shift so quickly that long-term interest rate prognostications are almost impossible. That's why the annual ARM insures that you'll always be on the right side of the market.

Brian,

One of my best financial decisions was my arm in 1989. It even had that horrible negative amortization. I watched all my friends refinance at 9% then 8% then 7%.then 6%  Mine just kept going down and down and down from $2000 a month to $700. a month.

Some wall street genius on my buildings board refinanced our underlying mortgage at 8% with a huge pre payment penalty. So we're stuck at 8%

My clients are more conservative than me. They all want 30 year fixed.

It's an education process, Mitch.  Use your building loan and your personal loan as examples of what TO do

Brian,

Awesome post.  I would add that the LIBOR tracks closely to the Fed Rate and since the Feds typically overshoot their rate, we can look forward to lower interest rates tied to these indexes most likely. 

That's very true.  An ARM today makes more sense noe than it has these past 2-3 years.

I learned how to overcome the bias for the 30 year fixed 20 years ago when I got my first amortization program on my computer.  Just show them the numbers. 

The average time in a home in my area is 2.5 years and Daddy says they have to have a 30 year fixed loan????  Oh, and a brick home too. 

Shucks, let me know that young couple a new or newer home with a 1-3 year ARM and I've just made a sale.

Thanks.  Good info.  I'll pass it around to my agents.

I love the comment about what Daddy says. 

Brian - very interesting!!  Can you provide an example that goes back a little further in time???

good stuff

we have a guy here in dallas who is Big on arms.... has a website devoted to it.

i am a leg man myself, but i digress

thanks for the great post

Somebody needs to pull Jacobsen in from the rain. His brain is starting to wrinkle.

Brian, as always, you deliver with sound logic backed-up by sound mathematics. Here's the problem. People choose loan programs for all sorts of reasons. Logic is about 9th out of 10.

I don't have any data going back that far, K.

Thanks for the comments, Ken and Tom.  Logic is low on the list, isn't it?

Great comment, but the guy two posts up is right: Finding out what people want and giving it to them is the easiest way to persuade or influence them.

Part of being a mortgage professional is educating people, but you can't throw all your weight behind convincing them of something that affects them so negatively on a subconscious level.

What about those folks who got a 30yr fixed at 4.875% a couple years back...surely an ARM would be higher than that for the rest of the life of that loan, right?

This could be the first five year period (2003-2008) where the history does not ring true.  However, capturing the absolute bottom of a 45 year market is sheer dumb luck.  Considering that the average hold for a mortgage is 3-5 years, you're almost always better off in an annual ARM., especially in this inverted yield curve market.

Getting past the psychological barriers in a client's mind?  You're comment is dead on; it's an education process.  All we can do is show them the facts and let them decide.  I am, however, passionate about educating clients to make decisions based on critical thinking. 

Good comments and welcome to Active Rain! 

I would like cash out, low payments, lower interest rate and a 100 year balloon payment.  And could you supersize that? :-)

This is for Rich J.   I'm with you.  I must admit that I'm probably guilty of making one or two Leg loans during my career.

Funny stuff, Suzanne.  It illustrates how mortgages are not just a commodity.

Ron:  We've all made a LEG loan or two.  Sometimes they work, sometimes they don't. 

Brian,

Thanks for sharing this... I made it the feature post for the Mortgage Group.  It is something that we should all be made aware of, or at least reminded of.

Fear of change is a greater motivator than logic and reason.

Good post.

Brian - In the third paragraph your total is "interest and costs", but in the fourth it looks like it's just interest. Wouldn't there be costs associated with each one-year ARM?

John Novak:

That is a great question.  No, the ARM adjusts to the market rate every 12 months.  There are no closing costs associated with an annual rate adjustment .  I'm glad someone asked that question because many probably thought it.

Brian-Do you operate in the Hawaii market?

I do, David.  All 50 states now.  I'll give you a holler tomorrow.

As a mortgage professional, I love this information and I will share it with my clients.  As a very conservative person originally from North Dakota, I still like the long term safety and security of 30 years fixed under 6%.  I am a third generation of home owners who stay in the same home for 30 years. 

The best definition I've heard for financial freedom is when your passive income exceeds your monthly expenses.  The only ways to do this are with huge assets and/or low debts.  The less I owe people the better I sleep at night.  Obviously ARMs are great for the right borrowers, it just seems to me that many of the borrowers that come to me for ARMs are doing so beacause they can't afford their debt load at the current rates and unfortunately they may be in even worse shape when their loan goes adjustable. 

I also think a neg am option ARM is a great product for the right borrower, that being someone who will be investing the difference and earning a higher rate of return then the appreciation on their home.  Once again, the people I see inquiring about option ARMs are the ones who are doing so because they can't afford to stay in their home otherwise. 

There are no bad loan products out there, just bad loan officers who can't explain the product or who put their clients into a product soley based on how much they will make and how often they can refinance them.

Ken:

You are dead on.  It seems that those who want the ARMs are the ones that shouldn't have them. 

I think if you practice the old qualifying practice of start rate plus 1% for qualifying, you can determine ability to repay easier.

You know, some of these old-school underwriting methods don't look so "antiquated" now, do they?