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I just do not get it. ARMs still have a great place in the loan industry. (I'm not a mortgage broker/real estate professional).
I have an a 5 year ARM on a home I purchased in 2005. I pay about $700 into the principal each month. My principal has been reduced by 40K since I started paying on the loan.
I fully understood how ARMs worked. It's so clearly stated in each loan paperwork that I signed. I just think people claim stupidity when they state they do not know what they are signing.
So why is the media making it seem so bad if someone's ARM is adjusting these days. The 1 year Libor rate is currently 2%. Plus an index (margin) of 2.25. That means most people's ARMs would reset to only about 4.25-4.5% mortgage interest rate. So most likely you would see your mortgage payments be reduced without using taxpayer money to bail those homeowners out. I don't think the world governments will be raising interest rates for at least the next 18 months.
The media is giving the ARM loans a bad name. An ARM where you pay into the principal each month for 3-5-7 years is fine.
Now, I understand those who took out option ARMs or interest-only ARMs....now I think those ARMs show only be given to young professionals recently finished with school who have a high earning potential.
I just brought another home and I would have gone for another 5-7 year ARM. But the weird thing is that they were charging me 5.125% for an ARM and only 4.875% for a 30 year fixed conforming mortgage. If I could have gotten a 5 year ARM again and it would at least 0.5% less than the going 30 year rate, I would have jumped on it.
How do you fellow city-data people feel about ARMs? There should still be a viable market for those types of loans. I guess investors are scared silly. If I were an investor and had a young lawyer or doctor or dentist or MBA straight out of school, I would not hesititate to give them an ARM loan.
I don't think standard ARMs are that big of a deal (although they are a stupid choice right *now* with the interest rates where they currently are). It was the option ARMs (a.k.a. "pick a payment" loans) that allowed for negative amortization. These "allowed" people to make monthly payments that didn't even cover the interest for that month. As a result, their mortgage balance actually went up. After the balance hit a certain point, it would "reset" to requiring full interest+principal payments at the actual interest rate. In many cases, this nearly doubled payments for people because the mortgage balance had gone up so much.
I've always said there are no bad loan programs. There are bad matches between clients and loan programs. Even the Option ARM has a place. If you have a seasonal rental-beach house. Nothing coming in during winter pay the minimum neg am payment, then in summer when your getting $2000 week make upi principle payments. If you have very variable income it is also good for a primary residence- say 75% of your income comes in quarterly on commission or bonus it would be a useful program. Now where it doesn't work is for the W-2 salaried employee using the minimum neg am payment to afford his house.
Now, I understand those who took out option ARMs or interest-only ARMs....now I think those ARMs show only be given to young professionals recently finished with school who have a high earning potential.
As we can see now, people may not necessarily always make more money later. Paychecks are being cut, work weeks are shorter, pay raise freezes, etc.
There's even articles about doctors and dentists seeing less revenues as people are forgoing getting certain treatments/care.
(Though I see your point about drs as they won't be making only 40K afterwards during residency).
But most people aren't doctors. If they can't afford something today, then they shouldn't be purchasing it.
I like traditional ARMS, but like you found, the spread right now just does not make sense. And, only in the right setting.
If we are headed towards double-digit inflation, look for the ARMs to make a huge comeback, because then most likely, the curve will be actually curved (and not flat, like now) and you will see the spread widen between fixed and the start rate on an ARM. If that happens, they (ARMS and the borrowers that have them, will be cursed, because payment caps on most first adjustments go to the life cap, around 5 or 6% over the start rate).
I would be relieved they don't make sense right now. Let's say a 5/1 had a 4% start rate right now.....that would be a capped rate of 9% or 10% in 2014. (5% or 6% first adjustment cap). Double digit inflation would make this a real possibility. OUCH!
I am only playing the devil's advocate. Most of my long-term customers have only come out ahead. I just see caution in our future.
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