Adjustable rate mortgages. ARMs. The evolution of this loan is now quite complete.
Payment options? All gone.
Negative Amortization? All gone.
Balloon payments? All gone.
Prepayment Penalties - Almost extinct and getting there.
1, 3 or 6 month adjustment periods - Almost extinct and getting there.
All of the horror stories that made these loans the incessant dumping ground of political and media pundits are over.
Ok, so what is left?
The Devil is in the Details.....Right?
Usually true. As you can see above, there were many reasons to have concerns regarding adjustable rate mortgages, with so many terms that normal people would find themselves scratching their heads.
The most common issue with adjustable rates was understanding the adjustments, duh!
If you read the promissory notes thoroughly, then you usually did not have an issue with the loan, but if you skimmed it as so many people did, then you often found an unpleasant surprise down the road.
Like any contract that you are signing, reading it and understanding the details is critical. Banks do NOT change the terms after your loan closes, so you have the opportunity to read them.
Ok, so what is on the table now?
Well, today's ARMs are much more simplified. Most do not adjust for 3, 5, 7 or 10 years. This can be a very useful tool for the consumer, if you are thinking you will refinance or sell in that time frame. When they do adjust, there are caps or limits as to how much they can adjust - this is a vital protection for consumers who end up keeping the loan after it adjusts. It is common to see an adjustment limit or cap of 2% over the start rate, or beginning rate. So, if your rate today is 3.00%,the adjusted max rate would be 5.00% when it does adjust. Even if the market has increased more than 2%, your adjusted rate is limited to 5%.
Another great feature is that most adjustables now require principal reduction, so every month your balance is reduced (assuming you make the payments!).
Perhaps the most attractive feature is the lower interest rate than fixed rates. Today a 30 year fixed rate is 4.25%-4.50% depending on the points you pay and your loan amount. The APR is usually 4.37-4.80%).
However, rates on adjustables are typically 1% - 1.5% lower, and the difference in payment is significant. For example, if you have a loan amount of $300,000 and a rate of 4.25%, your monthly payment would be $1475. On an adjustable at 3%, the same loan amount of $300,000 would cost you $1264 per month.
As the loan amounts go higher, the savings are more dramatic.
The Fine Print.....
Read! Read all the details before taking any loan. There are no secrets on any loan, and a dose of common sense will keep you or your clients from getting stung in any way.
Consider how long you will keep the loan - since it may well be possible for you to never see an adjustment if you are in a loan that you plan on paying off or selling in the near future.
Have a clear idea about how long you will keep the loan, and plan for longer just in case - make sure you can handle the payment at the max rate if things change.
What is your experience with adjustables? Did you have an aha moment at some point? They are much more tame these days and we would love your comments/insight!
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