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ARM or not to ARM?

By Dustin R Burke, Adonai Financial

ARM or not to ARM? I work with clients from all over the world, from New York to London to Tampa to Dubai. And, there are basically two contrasting views on ARM loans: the “middle class” American view and then everybody else.

It’s my observation that overwhelming middle class American clients prefer, if not demand, a fixed rate mortgage for the entire term of their loan. Contrast this with international clients, who prefer, if not demand, a variable rate mortgage (as they call it), or adjustable rate mortgage (ARM, as we call it).

Why is there a difference? Douglas Duncan, chief economist at the Mortgage Bankers Association of America stated that the average mortgage life is three to five years, but 83% of mortgages are taken out for 15 years or more. Adjustable-rate mortgages have lower start rates than fixed rate loans, but most American borrowers remain skeptical. Why? I believe it is overwhelmingly because the loan facility options have not been properly explained to them.

When is an ARM right for me? If this is your first home with expectations of building additions or future upgrades an ARM may make more economic sense. If you’re an investor who only plans to hold a property for a couple years, then consider an ARM.

You also need to be willing to stomach the risk. The risk protection isn’t free on fixed rate loans, but you might be better off without, unless you absolutely cannot handle an increase in future payments.

An ARM loan worked for me. I’m in mortgage business and I don’t have a fixed rate loan. Why? Because, I know the statistics that I will either sell my home or refinance within 5 years. Currently, I am two years into a five year fixed and I am very glad I did. I saved over $100/mo in payment verses a fixed rate loan and as expected my wife and I will be ready to upgrade in a year or so.

The ARM worked for me, and used properly it may be a better option for you.

What do you think about adjustable rate mortgages? Send me an email at dustin.burke@adonaifinancial.com.

"Adonai Financial, your friends in the mortgage business!"

Posted by Dustin R Burke on 02/15/2008 04:14 PM

Comments (4)

arm, fixed, mortgages

4 Comments on ARM or not to ARM?

FEB

2008

In Wisconsin the average first time home buyer stays in their home 5.1 years... which should make them an ideal customer for an ARM... the fact is they have been getting info from family 30 fixed only...

Rick

FEB

2008

Dustin - I am with you. The notion that a 30-year, fixed rate loan is somehow superior to an ARM is simply not true. It is part of our American financial belief system, established and adhered to by our grandparents and parents. This belief was built upon post-Depression fears that a bank could simply come and take one's home if that bank ran out of money without cause. (At the time, banks could do just that, displacing scores of Americans.) As such, those who lived through the Depression or whose parents did so believed that it was imperative to own one's home "free-and-clear" so that the bank could never "take it away." Needless to say, owning one's home outright is a noble goal, and one that aspire to myself. But with the prices of homes in most areas, this is just not realistic.

Plus, Federal law has changed, and lenders cannot simply call notes due because they are out of money. Additionally, society has changed, as you pointed out, in that people remain in a mortgage for between 3 and 5 years. The reason is twofold: First, people now have a greater chance for rapid upward mobility which is more likely to manifest itself in a new home than in the past. Second, the home mortgage is used as a financial tool - not simply to purchase a home - but to finance the modern, more materialistic American lifestyle. And there is nothing fundamentally wrong with this. If one knows that he or she is going to be in his or her home for 30-years and not need to refinance, then by all means take a 30-year fixed. But, for my money, the best program on the market is the 5-year ARM.

I agree with you. The fear factor is what keeps people focused on a FIXED loan only!

Great points Steve. Thanks for your comments. I may have "borrower" some it later and use it as my own. Thanks again.

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