Risky Home Loans Explained Somewhat LOL

By
Real Estate Broker/Owner with Charles Stallions Real Estate Services

I saw this article on CNBC and it made me think.

Here's the title: Demand for riskier home loans is high as interest rates soar.

Free Wooden House on Grass Field During Foggy Weather Stock Photo 

At first glance, a title like that sends little chills up my spine. 2008-2009 anyone? Reading the article, I found that it was filled with mortgage market jargon:

"Total mortgage application volume dropped 2% last week compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index, a consequence of surging rates.

The average rate for 5/1 ARMs, which has a fixed rate for the first five years, increased slightly, but was still lower, at 5.56%. The ARM share of applications was just under 12%. When rates were lower at the start of this year, that share was barely 3%, where it had been for several years.

ARMs can be fixed for up to 10 years, but they are considered riskier loans because the rate eventually adjusts to the market rate. Rates have been so low for so long that before rates started to rise borrowers didn't need to take on that additional risk."

YIKES! What does all that mean?

Basically, these pundits are saying that fixed rates have risen and that some people are using tools such as ARMs (Adjustable-Rate Mortgages) to make their payments more affordable.

So, is this a repeat of the mortgage loan insanity that set off a global meltdown?

In a word: no.

Adjustable-rate mortgages have been around for a long, long time. They can be excellent tools to use depending on your specific situation.

For example, let's say that a 5 Year ARM would bring your payments down to a manageable level and you feel really happy about that.

As we dig into your plans, goals, and financial needs, you tell me that you have no plans to move again within the next ten years and that you can definitely afford the payments on a 30 Year Fixed loan, even though the rate is higher.

What's the risk factor here?

If you take the lower rate offered in the ARM, you have five years before the rate could adjust - and then it would have limits on how much it would increase or decrease based upon the market rates at that time.

Some government programs will only allow an ARM to increase or decrease by a maximum of 1% per year after the fixed period has expired.

So, as my client, I'd spend time and ask more questions before prescribing the best options.

What's an unsatisfactory risk for some people can be exactly the right situation for others.

In other words, one size does not fit all!

A "risky home loan" is simply one that does not match your needs, risk tolerance, plans, and goals. We have many safeguards in place to forestall the kinds of irresponsible lending that caused so much trouble over a decade ago.

As we move through changing times and market conditions, I want to be of service to you and help you make the best possible decisions.

 

Bottom Line

Serious buyers should approach rising rates as a motivating factor to buy sooner, not a reason to wait. Waiting will cost you more in the long run. Work with a real estate professional to understand your budget and how you can be prepared to buy your home before rates climb higher.

 

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Charles Stallions, CBR, CRS, CSR, is a licensed broker/ owner representing buyers and sellers in Pensacola, Pace, and Gulf Breeze Florida. Text, Call or Email, "answer" to Charles at 850-476-4494 for the answer to the two most important questions you need to ask YOUR next real estate agent or loan officer.

Comments (1)

Bill Salvatore - East Valley
Arizona Elite Properties - Chandler, AZ
Realtor - 602-999-0952 / em: golfArizona@cox.net

 Great information.  Thanks for sharing, enjoy your weekend, and here's a GOOD LUCK to your favorite COLLEGE or NFL Team!

Nov 26, 2022 05:21 AM