In the Last 24 months, the popularity of the adjustable rate mortgage plummeted. With the inverted rate curve, it just made better sense for a mortgage lender to advise a client to stay far away from this product. When you could get a better rate on a longer term note that would not adjust it became pretty clear quickly that we had a one trick pony.
It was like going to the ice cream shop and asking for "Rocky Road" and you were told "we only sell Chocolate, Vanilla or Strawberry".
What's funny is how many mortgage lenders used huge amounts of advertising dollars to make the public think that they were trying to protect them by putting them in a 30 year fixed mortgage. The motive was because it was the only show in town.
As Broker Bryant would say "Well Folks" that is about to change.
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As you can see in the graph above, the 30 year bond yield and the 10 year note yield are no longer inverted. Mortgage lenders are now able to offer a much cheaper alternative to the 30 year traditional mortgage again.
What does this mean to "Joe Homeowner". It really just depends on your unique situation. If you are in a market for a home or are looking to refinance, then one of these options could be a much smarter loan choice compared to the 30 year fixed.
Yesterday, I quoted a borrower a 30 year fixed rate at 5.75% but the alternative 7/1 adjustable rate mortgage was pricing at 4.875%. Well my client was not planning on owning his home for another 7 years and liked the much lower payment.
So if you are a savvy borrower and are looking for more alternatives, here is another one that might make sense to your unique situation.
We are unique people out there. We expect better then "would you like fries with that drink". I just have learned to use my Midwest values and transfer them into my mortgage business. If you are looking for something a little more unique in your next mortgage loan, please do not hesitate to get a hold of me.
My name is Gary Miljour and this is what I do best.
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I am a still old fashioned guy. I would rather have my clients protected from any issues such as falling home values, or if there plans change.
Russ,
I understand that an adjustable rate mortgage is not right for everyone. However, a 30 year fixed mortgage is usually the most expensive way to finance a home and my typical client usually never sees the mortgage go the full term. What I try to do is offer this loan as an alternative based on how long the client plans on owning that specific property. Last each market is very different. Arizona's market might be a lot different from the market up in Michigan. Thanks again for the comment.
GARY - This is an excellent point. I believe that we are a society that has a herd mentality. There was a time when everyone was looking for adjustables, and now it's back to 30-year fixed loans as the flavor of the month. The truth of the matter is that every borrower should determine their product by their goals and intentions. You gave a great example. If you're looking to move in less than seven years, why bother with a 30-year fixed? It only makes sense if you're one of those people that will spend every dime you make, and you want to use your mortgage payment as forced savings. Otherwise, this particular homeowner will never see the benefit of this loan.
Hey Gary!! Nice post.
2/28 & 3/27 - BAD (for the most part)
5/1. 7/1, 10/1 - GOOD (if this is what the client needs)
OPTION ARMS - BAD or most, GOOD for some
If we are a professional mortgage broker we need to look at the clients financial picture and make recommends based on discovery. While I am not going to get in to the "why's" of these mortgages. We have a responsibility to present and let the client decide.
Happy Selling!
Tony Grego - Indiana Mortgage Broker
Adam,
Thanks for the comments, I agree these mortgages can benefit the client is the right questions are asked upfront.
Tony,
Certain ARM products can be great for a customer, and it sounds like you take a very similar approach to advisement to the client. Thanks for the comment.
Gary,
excellent post, however I am disapointed in the answers by some of your readers. Option arms are such a better product than a 3,5 or 7/1 arm. I don't think the majority of the people out there even know how to utilize an option arm. By the way, how does a 30 year fixed protect you from dropping home values? This is a ridiculous statement Russ.
Option arms don't mean pay the minimum payment because you can't afford the other options. The loan gives you flexibility, Bottom Line. You have 4 options as opposed to the one with the 30 year. Read this if you want to learn what the loan is for, Is this loan for you? The fact of the matter is that most people want a 30 year fixed because they are too lazy to learn what other loans actually do. Put some bad press in the papers and on the TV about the 30 year fixed for 6 months and I guarantee you that nobody will want the loan.
You as brokers should utilize every loan available because they are options for you. They are ways for you to help your borrowers and make money!
Gary.... I was pointed over here by Ron's most recent post... and I am glad. Let me first reply to Russ's comments. As Ron stated, how does a 30 year fixed rate protect you from declining home values? I would first say, get to know the reasons first, before making such a blanket statement based on one reason only.
I am going to assume why you made that statement. Many people were put into a 2/28 subprime loan, because their credit wasn't worthy to get a conventional loan or a FHA loan. Sure, many loan officers did steer clients into this type of loan because they didn't know much about FHA.... but let's visit this a little further.
As Gary and even Adam mentioned, we as a professional need to know your goals. I have a client right now that is refinancing out of the end of a 5 /1 arm... and I am putting them into another 5/1 arm and that rate is 5.25%, instead of 6.00%. I am even giving them a lender credit of $1,000. So basically, all they have to do is cover their prepaids/escrows. You could say that it's actually costing them another $1,000 total, because of the title and title fees on a $417,000 mortgage. And they already pay for their own taxes out of pocket. So, they are basically saving more money this way than a 30 yr fixed.
Back to your statement though, about the equity. You are just following the media and the news, because you don't know any better. There were many different types of adjustables out there, each with their own reasons. Until you understand those and the consumers individual goals, you can't make a blanket statement as the one you mentioned. Especially, as mentioned, not everyone holds onto a 30 yr fixed loan. And if you pay attention to the market, every 3 to 5 years, the adjustable are much cheaper... and when it comes to that point in time, your payment could stay the same or actually lower. But again, it comes down to your goals, long term and short term.
And Gary..... good topic and example here..
Jeff is absolutely right. I would never put everyone into an option loan, not because it isn't good for them, but because they might not be responsible enough to use it correctly.
This is the same for a 30 yr fixed loan or any other loan for that matter. This isn't the 50's, jobs don't last 30 years like they used to. needs and products change for a reason.
Ron,
Thanks for the comments, I also agree that the option arm under the right circumstances and for that borrowers specific needs is a great loan. In the past I had an option arm on my own home and loved the loan for 5 years, but then when my personal needs changed, my wife and I went back to a 30 year fixed. We had our reasons which were based on our specific needs.
Jeff,
Great to see you leaving a comment, I think you summed it up when you stated that we need to be mortgage professional. A true mortgage professional is going to educate and guide their client into good financial decisions. Jeff this is what I know you have been doing for a long time.