Redefining ARM loans
They're not as risky as the market presumes
Adjustable rate mortgages developed a bad rap for being riskier and less cost effective in the recent low-interest rate environment. But as interest rates on conforming loans continue to climb, more borrowers are leaning toward ARM loans, putting them back in vogue again.
"It is very interesting because over the years I have seen a lot of shifts in the market. When the market shifts, then people’s thought processes shift," said David Hall, president of Shore Mortgage.
Most people will take out a 30-year, FRM because they do not understand it. Chances are they have in their mind somewhere that an ARM is bad because their neighbor had an ARM that went wrong, Hall explained.
Unlike how a conforming loan locks the borrower into a 30-year or 15-year term, Shore Mortgage recently rolled out a new line that allows the borrower to choose the timeframe of their loan.
Terms are available from eight to 30 years giving homebuyers and homeowners flexibility both on personal cash flow and on how long it takes to pay off the mortgage.
"The 30-year and 15-year, fixed-rate mortgage are a thing of the past," Hall said.
The biggest misconception in the mortgage industry from 2007-2013 is that ARMs were behind the financial meltdown. But in reality, Hall says no ARM payment has adjusted up in the past six years.
"You’re chances of getting hurt on an ARM are lower than ever," he added.
But ARM loans are not the only option that borrowers are turning to besides conforming loans.
The jumbo mortgage market continues to heat up and serve affluent and high-end borrowers.
The rates are still better for jumbo loans and people with a lot of assets, said Gabe Medrano, a regional sales executive for NexBank's correspondent lending division.
The new Qualified Mortgage rules that are coming out on Jan. 10, eliminate the 1-and 3-year mortgage, which is most likely to vary in effect regionally.
Medrano expects to see a spike in smaller regional banks since they are more likely to be portfolio lenders. Since there is more of a relationship built, people are starting to gravitate to their local bank.