Adjustable rate mortgages, ARMs for short, are the most misunderstood, misused, and maligned financial instrument. The have been abused by consumers, Realtors and loan originators alike these past 3-4 years and are now the subject of national scourge. Much like our Second Constitutional Amendment critics, the ARM critics are usually misinformed and preying upon the fear of catastrophe.
These inexperienced mortgage sales people or "loan hacks" as I like to call them, are banking upon your fear of catastrophe. Loan hacks sold you ARMs in 2003 and negative amortization ARMs in 2005. After they ride the fixed rate mortgage trend, they'll move on to reverse mortgages. They lack original thought and critical analysis. They'll sell you any loan that is on the front page of USA Today.
ARMs don't cause foreclosures, loan hacks cause foreclosures.
READ: I am an American ARMs dealer.
Fixed rate mortgages, for the lion's share of the population, are an inappropriate recommendation. Mortgage advertisers, unschooled in financial planning , are aggressively advertising fixed rate mortgages as a cure to the rising ARM rates. They're encouraging you to sell low and buy high.
SAY WHAT? DID THEY FORGET THAT RATES GO DOWN, TOO?
You should lock in a fixed rate mortgage at the low end of an interest rate cycle, not the high end of it. It is easier to sell fear than to properly counsel you so these loan hacks will try to baffle you with slick sounding "Myths".
Three Myths Fixed Rate Loan Hacks Love to "Quote":
READ THE REST ON AMERICA"S MORTGAGE BROKER
Very well written, Brian.... have you read some of Mike Mapes posts?
There are only a handful of loan officers in Active Rain I would do business with...and you are one of them....
Brian,
I liked this post very much. You have a way of putting things that makes it easy to understand.
Thanks,
Fran
Jason,
Your analysis of the product selection demonstrates your critical thinking and immediately disqualifies you as a loan hack. It's the critical thinking that originators need to bring to the table.
The theory works for a "average folk". Shouldn't they model the financial decisions of the wealthy? The only difference those two sets of borrowers have is a zero on the loan amount, payment, and amount invested each month. I'd submit that the case is even more compelling and advantageous to "average folk". FHA loans, "available folk" offer rate caps of 1% per year which is more protective than the 2% annual caps for conforming loans.
In the case of the $100,000 loan amount, the amount saved by the 2% rule I cite would be $2,000 annually.
The real problem with average folk is that they are pushed into homes by the allure of easy riches. We hold home ownership in high esteem in this country. Now, more than ever, it's better to wait until you have liquidity before you leap into a home purchase.
Again, you're no loan hack, Jason.
Great post Brian-
It's a shame that we need to be so polite!
I think I can come up with a few stronger terms than "Loan hack" - but I'm sure you can too.
The Mortgage process really isn't so difficult - but these fools have certainly done everything possible to make it seem that way.
See ya at the conf.
Very nice and worth waiting for. However, as a alternative to buying the home leaving little liquidity or renting, other alternatives are to buy a lower priced home.
Uh oh, I feel a blog coming on. This is a discussion that has it's genisis in home pricing, not necessarily interest rates, types of loans or even . . . . . STAY TUNED.
I think you nailed it with.... 1- Qualify for the mortgage at 2% above the adjustable rate. If you are selecting an ARM to "get into" the home, you should be renting.
Most of the people in ARMs right now that are having trouble..... simply bought too much house. Keeping up with the Joneses never cost so much!!!
Looks like they will be renting soon enough,
I'll bet Lenn's post is good. I have an idea where she's going to go with it.
Brian,
Thanks for the post. This is a great article helpful to both real estate professionals and consumers alike. I have bookmarked this and would like to use this for my buyers, with your permission.
Brian,
Sad for us brokers, I think we all should have done more homework, because you pointed out all of the right facts to help a consumer differ between the two loans, I really should have thought some more about my post.. Great job!!! But hey I tried :0)
Tom Weiss
This is really excellent.
I have always preferred the ARM products. I run amortization schedules for buyers showing the interest saved on the ARM over the first few years and there is rarely a justification to pay the premium for the old 30 year fixed that their father said they should take.
The info on the invested yield curve, margins and the historical picture is very interesting.
This post, although it will be seen by the public is being read here by mortgage and real estate practitioners and the depth is welcomed.
You broke Lenn's Law by mentioning the "R" word.
Brian... boring, boring, boring..... lol Seriously... no story involved, but you baisically hit the nail on the head because. I mentioned this in Rich Jacobson's contest post.... basically looking at the yield curve, the cycles, and the margins, not to exceed 3%. You also mentioned qualifying clients 2% ABOVE THE RATE.... in which do you remember, that this use to be a requirement in the early to mid 90's? Gee, and there weren't as many problems. But investors relaxed on this..... do you know FHA has raised this standard... I think it was back in 2002. Times flys.... but you qualify at the 2nd year rate and as you mentioned FHA's caps are 1% per year.
Lastly, you said that many consumers are just fearful ... that so many think that fixed rates are the safest. You did mention that the consumer should seek someone with financial planning training.... great advice, The only thing that I think your blog lacked was mentioning that the loan officer, in order to advise correctly, should ask the consumer about their goals. This needs to be factor into the equation in order to give proper and good advice. Just my .02.
Other than that..... excellent... you basically covered everything and this was easy to understand.
Brian...2 more things that I wanted to mention....
1st off...from talking to you in the past, I know that you know that you need to ask the clients goals... maybe you just felt that you wanted to touch upon this. You bring up strong points.
2nd... I meant to say that you brought up the fact about investing these savings. Excellent point that is not touched upon... if you don't do this, the only thing that you can gain from the arm are bigger tvs, nicer cars, and trips. But you can't cash these in if you get in trouble.
Brian - THANK YOU
Every home owner needs to read this. They throw away thousands of dollars every single year because they believe that a 30 year fixed rate loan is their best and only option.
True mortgage professionals know how to find a client's risk tolerance, understand how to help them achieve their financial goals, and can explain loan products properly.
I'm very happy to have you on "our" team as a loan professional!!
Galel
I was laughed at several loan officers for putting my clients into the 7 yr balloon back in '98 to '99
That spread was HUGE back them. I probably wrote $2-3 million in 5 and 7 year balloons in 99 and 2000. Of course, that was a lot of money back then; it represented 20-30 houses.
and when I told so many on that difference, you should have seen their eyes light up. But you know what's sad, they were lazy in learning the difference and how a balloon worked... one main reason is because it takes another 15 minutes to explain the ins and outs.... lol Bottom line, these same loan officers went back to selling the 30 yr fixed rates....
So, you and I were both on the same page back then and still are.
I have bookmarked this and would like to use this for my buyers, with your permission.
Anything I write may be used, with my full permission, by anyone. Please publish with author credit and a website:
www.Brian-Brady.com
So, you and I were both on the same page back then and still are.
and probably will be ten years from now.
this was really good and very good read. I am sorry i missed it earlier.
Michael Mapes
Brian.... I mean, Mr. Brady.... you out did yourself here. Very easy to read and to understand from a consumer's perspective. Congrats on 2nd place...
Brian,
Congrats to you, I think you did great, and you made it very tough competition for us, but it was fun!!
Tom Weiss
Brian, I am now trying to sell a home for a client who got slammed by a loan hack just two years ago. 2 year interest only at 7.5, LIBOR index, after 2 years payments can increase, and did, to interest rate of 10.25, can increase each 6 months by 1% to a max of 14.5%. I guess loan hacks were at work here.
More importantly, after reading this article, I re-read the ARMs dealer post. You have a broken link regarding tempering reverse amortization. This sounds like an important concept, maybe you could adress it in a future post.
Brian,
I share in your opinion that many loan officers play up to the fear that people have and thus through there clients into a cycle where they are refinancing from the ARM, to the Option ARM to the Fixed. One thing I have noticed has not received tons of attention and I wonder if you see this coming as well is how "trendy" it was to sell the Option ARM and now that it has such a negative image that it is now "trendy" to sell the Home Accelerator plan. I see this mortgage and the software that come along with it as the next loan to cause mass problems. Any thoughts?
One thing I have noticed has not received tons of attention and I wonder if you see this coming as well is how "trendy" it was to sell the Option ARM and now that it has such a negative image that it is now "trendy" to sell the Home Accelerator plan. I see this mortgage and the software that come along with it as the next loan to cause mass problems. Any thoughts?
I don't think accelerating debt in itself is a problem...UNLESS..you're doing it at the expense of liquidity. The problems with accelerating the amortization:
1- It may limit the deductibility of interest on any cash out refinances you do in the future.
2- It strains liquidity.
Better to maximize home indebtedness, use an interest-only or neg am loan (when appropriate) and invest the difference in a side fund.
Cash is King...then, now, and in the future.
Brian: Just wanted to stop by and say congratulations. I wrote a blog yesterday that mentioned why I think this blog should be an ActiveRain Hall of Fame post (if there is such a thing) There was never a doubt in my mind you would be one of the winners...this is one of the best I've seen.
ARM'S outperformed fixed rates since WWII.
No, that's not the claim.
Read it again. "Any given five year period." Not any given period.
And not just any ARM, but the one-year ARM.
And not against fixed rates, but only against the 30-year fixed.
Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.
Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.
No, I think we'd like to hear the rationale for your prognostication about rates, Robert.
Excellent post, Brian. You are a master at this stuff! See you in SFO!
Jeff
Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.
No, I think we'd like to hear the rationale for your prognostication about rates, Robert.
Hi Brian.
Mortgage Rates Decline but One Year ARM Rates Go Off the Chart
I guess technically I was wrong; It only took 2 months, not 24.
One step ahead of you, Robert. Written in response to that article last week
It's temporary
One step ahead of you, Robert. Written in response to that article last week
It's temporary