Don't Be Fooled Again!

Many people will tell you that an Adjustable Rate Mortgage (ARM)  is horrible, and something a borrower should never take out.  A friend recently stopped by worried that his ARM was adjusting and that his payment would go through the roof.  We analyzed his paperwork and found out that his interest rate would be going down by MORE THAN 2 PERCENT!  This made a big impact on his payment!

The ARM's that were bad were:

• Sub Prime loans where the rate was artificially low
• Had super short introductory periods like two years or less
• Had a pre-payment penalty that was in force longer than the first adjustment of the loan
• Had a payment that didn't even cover their interest

These loans were definitely toxic.

The difference between today's ARM's?  Today's ARM's are much safer and better loans.  If you think you are only going to be in a property for 5, 7 or 10 years, you can find an ARM that has a fixed rate time frame that matches!   Here are features to look for in an ARM:

• A fixed rate period that is the same or longer than the time frame you are planning on staying in the house.  If you think you'll be there for five years, get a 5 year fixed ARM, or a 7 year fixed ARM.
• Caps or limits to how high the interest rate a go to both at each adjustment and for the life of the loan.
• Low margins.  What's a margin?  Essentially, it's the lenders "mark up" over the cost of their funds.  The lower the margin, the lower your future interest rate.
• Most importantly, a lower rate than a 30 year fixed rate loan.  If you are sharing the interest rate risk with the lender, you should get a break in your costs.

 Recent customers of mine who are moving to a new town for just five years, will be saving over 1% in interest rate compared to the thirty year fixed rate loan.  For them this means about $100 per month!  For $100 a month, they can buy their loan officer a steak dinner every month for getting them such a good deal!

Don't be fooled by so-called experts.  ARMS are a great deal IF MATCHED to the correct situation.  Thirty year fixed rate loans are great, but sometimes an ARM is a better option.