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Florida Mortgages | 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 04:15 PM

Comments (6)

arm, fixed, mortgages

Post is included in group: FloridaLoanOfficers

6 Comments on Florida Mortgages | ARM or not to ARM?

FEB

2008

I use both loans, I use arms, interest only, with no costs and negatives when I am investing, short term, and I use a fixed on my primary residence, 5.0% 30yr. Why? The arm I will be in for no more than a year, who cares what the interest rate is just keep my costs low. My primary home, well my Wife let me know that I could not sell it for fifteen years when we bought it five years ago, so I know I am in it for the long haul. The only way I am refiing this home is if the rates get down to 4%, I don't see that happening.

Take care!

RJH

I opted for an interest only loan in 2004 and got a 5-year at 4.5%. I faithfully make a principle payment in addition to paying the interest every month and enjoy watching the balance due drop. I'll refinance within the next year. Education is the key and informed buyers should throughly understand what they're getting into.

Thanks for your comments. The product works well when used under the right circumstances.

Dustin,

You pose a good question, the recent reaction to an ARM has been mostly negative.

One of the reasons your international clients have a lot less fear of an adjustable rate is because that is all they have know until recently.

When I worked in wholesale lending my secondary manager was from Australia. He had extensive experience in Europe. He told me when he first came to this country that our fixed rate 30 year loan was alien to him. He was brought up on 3- 5 years adjustable rate, interest only loans.

Our industry was built around the fixed rate, long term loan. It was not until our interest rates went into double digits due to inflation that the ARM became popular.

Personally I have a fixed rate, I accelerate my principal payments every month.

But I have advised a number of clients based on the needs to go with an ARM.

Lee Walsh

Dustin, I love both. I do more fixed loans because of my middle America market. I recommend ARM's when appropiate, but do find fixed a more conservative approach with rates under 6%.

MAR

2008

Dustin, adjustable loans are good options when we use it right way.

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