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A Realtor's Guide to the Power of an Annual ARM

By Brian Brady

Commercial Real Estate Agent with Matthews Capital Markets NMLS 2415712

December 07, 2006 04:53 PM

Why should you ALWAYS get a one year ARM rather than "locking" into a 30 year fixed rate loan? The easiest arm

answer is that you will NEVER be able to accurately predict interest rates. Did you know that Wall Street gurus are wrong over 60% of the time with their interest rate projections over a 3-5 year timeframe? What makes you think you know better than them ?

Did you know that over a five year period of time, the one year ARM has always outperformed a 30-year fixed rate loan? That statistic has held true for over 40 years. What that means is that your average interest cost for a five year period was less with a one year ARM, than with a traditional 30 year fixed-rate loan.. Let's look at the last five years and compare a LIBOR plus a 2.25% margin ARM to a 30 year fixed rate loan:

READ MORE AT www.MortgageRatesReport.com

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Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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

Dec 08, 2006 04:19 AM

Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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.

Dec 08, 2006 04:21 AM

Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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.

Dec 08, 2006 04:54 AM

Kaushik Sirkar

Call Realty, Inc. - Chandler, AZ

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

Dec 08, 2006 05:00 AM

Tom Burris

NMLS# 335055 - Baton Rouge, LA

Texas/Louisiana Mortgage Pro - 13 YRS Experience

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

Dec 08, 2006 05:02 AM

Ken Stampe

iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX

iBrandPlan

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.

Dec 08, 2006 08:28 AM

Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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?

Dec 08, 2006 08:34 AM

Jolynne Photography, Creative Wedding Photography, Family Portraits, Bar Mitzvahs

Jolynne Photography - Hemet, CA

Bat Mitzvahs, Senior Pictures, Event Photography

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?

Dec 08, 2006 11:50 AM

Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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!

Dec 08, 2006 12:05 PM

Suzanne Marriott

Keller Williams Arizona Realty - Anthem, AZ

Associate Broker, CLHMS, e-PRO

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

Dec 09, 2006 01:36 AM

Ron Withers ----Retired Mortgage Professional

Kissimmee, FL

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.

Dec 09, 2006 01:56 AM

Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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.

Dec 09, 2006 04:07 AM

Jason Price

Mortgage Financial Group, Inc (NMLS 219650) - Tavares, FL

The Mortgage Rider

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.

Dec 09, 2006 04:57 AM

John Klassen

M & T Bank - Kingston, NY

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

Good post.

Dec 10, 2006 01:32 AM

John Novak

Keller Williams Realty The Marketplace - Las Vegas, NV

Henderson, Las Vegas and Summerlin Real Estate

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?

Dec 10, 2006 02:00 AM

Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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.

Dec 10, 2006 07:14 AM

1SG (Ret.) David Kucic

Hawaii Military Realty, Inc. - Ewa Beach, HI

President and Owner

Brian-Do you operate in the Hawaii market?

Dec 12, 2006 04:12 PM

Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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

Dec 12, 2006 04:16 PM

Ken Horst

MLS Maps, Agentopolis, Tweet Me Homes - Minneapolis, MN

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.

Dec 24, 2006 02:39 AM

Brian Brady

Matthews Capital Markets - Tampa, FL

858-699-4590

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?

Dec 24, 2006 04:24 AM

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