Now that I got your attention by completely manipulating the statistics, I want to put up the caution flag before we revisit a sore subject. The following quote was obtained from a recent article regarding the growing popularity of ARM's.
"In the first quarter of this year, about 12 percent of the $325 billion in new mortgages made were ARMs. In the fourth quarter last year, ARMs made up 9 percent of new mortgages, reports the newsletter Inside Mortgage Finance. During the housing boom, ARMs made up 45 percent of mortgages issued in 2006"
While 3, 5 and 7 year ARM's are growing in popularity, we should heed the lessons learned less than a decade ago and proceed with caution. Rates on these products are attractive and buyers should be prepared to live in the home for the duration of the period of the ARM. The fallacy, and potential pitfall of these products, is in the belief that home owners will be able to sell their homes OR refinance before the rate resets and the payment increases. We made this assumption once before and look what happened.
If we have a collective "half a brain in our heads", these loans should initially be qualified based upon the subsequent payment that will have to be made at the maximum interest rate calculated at the termination of the initial ARM period (be it 3, 5, or 7 years). Had we approached the market this way several years ago, many people would not have qualified for loans OR they would have qualified for much smaller loans. Either way, the damage could have been mitigated.
I know this isn't sexy and it certainly purports a conservative approach to a topic that seemingly excites us in a depressed market, but it is a safe and responsible way to go. Buyers trust us and they will take whatever we are willing to give them. They just want to own a home, like the rest of us. This time around, we the Realtors, along with the mortgage brokers and bankers, need to be a loud voice of collection consciousness and do what's right. After all, we are the experts.
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