ORANGE COUNTY, California – When buying a home these days, it can cost you an arm and a leg, but some choose an arm.
ARM or interest rate mortgages, once considered one of the factors that led to the Great Recession of 2008, are returning. Real estate agents and mortgage brokers say the loan schedule is different this time around.
As mortgage rates rise – and interest rates are expected to continue to rise – real estate agents are seeing more and more home buyers looking for and using the ARM financing option instead of the traditional 30-year fixed rate.
“Most of my clients use ARM,” said Abby Ronquillo, founder of NetRealty in Corona. “It’s their way of fighting high interest rates.”
Unlike a traditional 15- or 30-year fixed-rate mortgage, ARM is a mortgage option that allows the borrower to lock in at a lower interest rate (lower than the fixed rate) for a few years before that. adapts.
Most mortgages offer five, seven or ten years. Once the ARM interest rate changes, the borrower’s interest rate and payment usually increase or decrease depending on the state of the economy. For example, a borrower with ARM 7/1 will have a fixed interest rate – or lower payment – for the first seven years before the interest rate changes.
“It’s a good choice for the right person and in the right situation,” said Jeff Lazerson, president of Mortgage Grader in Laguna Niguel. “It’s so important to realize that lower interest rates can bring down payment, especially in the jumbo market. There is nothing wrong with that, but you have to understand that you do not know what the interest rate will be at the end of the lockout period.” .
According to Bank Mortgage Association, the number of ARM loan applications for home purchase in California was 11.1% in February 2022. The number of ARM applications increased by 6.2% in California from year to year, the highest in the country. Nationwide, total ARM applications rose to 6.6% from week to week through March 25th.
As of April 5, the average national fixed-term mortgage loan for 30 years is 4.8%. The average rate of ARM 10/1 was 3.9%, according to Bankrate.
ARMs have a bad reputation as one of the reasons for the collapse of mortgages and the Great Recession of 2008.
In a study by the Brookings InstitutionThe authors blamed the rapid increase in lending to subprime borrowers (borrowers who would not normally have been approved for a loan) and the introduction of short-term ARM products as one of the causes of the financial crisis.
The authors said the lenders had two- or three-year ARM products with low initial payments that borrowers could refinance after the interest rate expired.
“These so-called teaser rates were often not so low, but low enough to allow the mortgage to be completed,” wrote Martin Neil Baily, Robert E. Litan and Matthew S. Johnson. “They told the borrowers that in two or three years the price of their house would have risen enough to allow them to refinance the loan. Housing prices were rising by 10% to 20% per year in many locations, so that as long as this continued, a 100% loan-to-value ratio would fall to about 80% after a short period of time, and the household could refinance with a compatible or top mortgage on more favorable terms. “
The problem is that the housing bubble burst. Mortgage payments skyrocketed when the economy stalled and many borrowers could not repay their new mortgage or refinance their exit. This led to a wave of home seizures.
From 2004 to 2006, ARM accounted for about 30% of the mortgage market. The traditional fixed-rate mortgage rate was about 6% during that period, Joel Kan, vice president of Economic and Industrial Forecasting at the Bank Mortgage Association, told Spectrum News in an email.
“This was also when mortgage supply was at an all-time high and sponsorship was much looser and there were more risky ARM products,” Kan said. “After the Great Recession from 2008 to 2010, the policy was much stricter (Dodd-Frank) and the borrowing standards were stricter, and borrowers had stronger credit profiles.”
Kan added that over the past 10 years, “we have seen a shift towards ARM loans with longer fixed interest rate periods, ie a shift from 3/1 and 5/1 ARMs to a majority of 7/1 and 10/1 ARM, with based on our application data. “
Sheila Nufable, a community lending officer at Bank of America Pasadena, said she does not advise ARM loans for first-time homebuyers.
“Many of my clients focus on getting a fixed interest rate in the long run,” Nufable said. “They do not want to take that risk. They are careful because the market is so volatile. They can not predict what it will be five, seven or 10 years from now.”
Nufable said ARM loans are generally for investors or for those people who do not intend to stay in their homes for long periods of time.
“They hope they can sell the property before the interest rate matures,” Nufable said. “It is a good product for investment homes or second homes. ARMs are for the most risky buyers.”
For Ronquillo, its customers with ARM loans make lower-level banking transactions during the introductory period and are refinanced by it before the interest rate expires. He said qualifying for an ARM loan has become more stringent and requires higher credit, FICO scores and sound cash reserves. He also added that the typical homeowner would refinance every four to seven years, anyway.
“Many of my clients understand the big picture – interest rates go up and down,” Ronquillo said, adding that one customer saves $ 1,000 each month on a 7/1 ARM loan instead of a 30-year repair. “ARM loans are for the very well trained. In the past, only income was declared to get an ARM loan. That’s why people got into trouble.”
Lazerson noted that whether a borrower chooses a traditional fixed rate loan or an ARM loan, with interest rates rising and inflation high, people should be conservative about their money.
“The key is to be conservative,” Lazerson said. “Do not overdo it, especially with WEAPONS. If you do not have a lot of money each month. If you increase your budget. Do not do it. Do not overdo it. And if you are not going to be conservative, make sure you have a plan. exit “.