Adjustable Rate Mortgages

[zahc]

I'm getting approvals for a 15-year fixed mortgage. At current rates, this will just barely get me into my target price range with a payment equal to 1/4 of my take-home pay, which Dave Ramsey says is smart. This will get me a 3.9% or so rate.

The mortgage brokers notice that I was in my last house only 3 years, and are pushing, for example, a 5-1 ARM which starts at 2.875% for the first 5 years, then supposedly can adjust, but the adjustment is somehow re-amortized to the then-current value of the home, and capped, so it's not that bad. It honestly sounds worthwhile to get the ARM, make the same-size payments you would have made on the 15-year fixed for the first 5 years, and you can't really lose vs. the 15-year fixed loan. And if I happen to move in 4 years, I totally make out vs. the fixed-rate loan. But everyone says "OMG never get an ARM". What am I missing?

[AmbulanceDriver]

I wouldn't do it unless I had a very savvy financial person (better yet if they're also a very savvy legal person) willing to go over every little last detail of the loan agreement and concur that you "can't really lose".

[Balog]

ARM's are like extended warranties. If they were really a good deal for the consumer they wouldn't offer them. It's possible to get one and not get screwed. It's possible to drive while drunk and without a license and not hurt anyone or get arrested. It's possible to smoke meth and not get addicted or have negative health effects from it.  It's possible to get drunk and point a loaded gun at yourself and not get shot. Still a bad idea.

[Brad Johnson]

ARMs are great for those people who know they are gonna move every 3-5 years AND have a pretty healthy relo benefit package. For the rest of us, not so much. The cost of a refi every 3-5 years to keep getting theower ARM rate washes out the savings.

I say stick with a traditional mortgage unless you have some pretty specific needs that make make the ARM terms a better option.  Rates right now are uber low on tradtional mortgages so it makes sense to lock it in for life and never incure refi fees chasing an ARM rate.

Brad

[Fitz]

VA ftw

[Firethorn]

VA ftw

Not always, for me VA loans were actually a point higher on interest rate, and that's without considering the surcharge for a VA loan(1% of the amount of the loan to be financed).

3.25% on a 15.  Wasn't touching an ARM with a 10 foot pole.

If you decide you might want one, I'd get somebody who can do math to do scenarios for you - How much you pay in, how much equity you'll have at the end of various periods, how much the interest rate can change, how fast, and what that would do to your payments.

What happens if interest rates go up?*  What does a 1% increase do to you?  5%?  Etc..

*Down is not a real option at this point

[French G.]

VA can go piss up a rope. I'm on my 3rd mortgage, VA never came into play. The rates were no better and the hoops to jump through were irritating. Last time no local mortgage brokers worked with the VA and I needed a loan now. Local bank had me a 3.5% fixed 30 in a week, no hoops. No reason not to go fixed right now, rates shouldn't be better in my life, possibly much worse. I remember my first mortgage was 8% fixed and a decent deal at the time. I lean towards a 3oyr and the slightly higher rate as a hedge against personal economic downturn. Pay more whenever you can and make it into a 15 year, but if things get tight you have less pressure on you.

[Fitz]

I had no major issues with hoops.. And at the time the rate was better. Obviously this varies

[lupinus]

What Brad said. In spades.

If you are the kind of person who moves around every few years for work, or you know within a few years you'll be wanting to move for other reasons, then getting a nice low ARM isn't a half bad idea. But if you have no plans to do so, then every source I've looked into said go with the fixed rate option. You have no idea where the interest rates will be in a few years.

[tokugawa]

no mortgage genius here, but in general I am very suspicious of things people can change in the future, to reflect future conditions- like ARM's. And tax deferred retirement accounts. etc.
 Get a 15 year, get the best rate you can, and put an extra few hundred on it every month- IMO.

[Balog]

What Brad said. In spades.

If you are the kind of person who moves around every few years for work, or you know within a few years you'll be wanting to move for other reasons, then getting a nice low ARM isn't a half bad idea. But if you have no plans to do so, then every source I've looked into said go with the fixed rate option. You have no idea where the interest rates will be in a few years.

Unless the market crashes, you can't sell your house for even %50 of what the note is for etc.

I know LOTS of folks who were stuck for years in houses they didn't want because the "home prices only ever go up" lie was believed.

[birdman]

Interests rates -will- go up.  Also, as that will contract the economy further, foreclosures will increase, and housing prices will stagnate or go lower.  So an ARM is a really, really, bad idea.

[cassandra and sara's daddy]

I know anecdote is not data but the hood behind me has 32 houses. 22 forclosed on in first 5 years. 16 of em arms that I know of. Not sure on the rest

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[Harold Tuttle]

i did extremely well with an ARM from 1993 till 2006,
it kept adjusting down over the life of the loan.

I don't think todays market is as boomy.

[Brad Johnson]

Unless the market crashes, you can't sell your house for even %50 of what the note is for etc.

I know LOTS of folks who were stuck for years in houses they didn't want because the "home prices only ever go up" lie was believed.

And how many times has the housing market crashed in the last 50 yrs vs. a relatively steady climb?  If we based everything in life on worst case estimates we'd all probably be hunkered in a hole somewhere waiting for the end of the world.  I think this 'ol world will keep spinning for a while so why not play the odds that history dictates rather than the oddities that Facebook perpetuates.

Brad

[birdman]

And how many times has the housing market crashed in the last 50 yrs vs. a relatively steady climb?  If we based everything in life on worst case estimates we'd all probably be hunkered in a hole somewhere waiting for the end of the world.  I think this 'ol world will keep spinning for a while so why not play the odds that history dictates rather than the oddities that Facebook perpetuates.

Brad

Um...steady climb approximately equal to supply/demand combined with inflation...sure.
What occurred 2000-2008?  Not so much.
Also, right now demand is decreasing, but supply is in excess, and prices are being propped up with effectively cheap money.  Should interest rates rise (and they will, or if they don't, a de facto dollar collapse serving the same purpose through inflation) what will occur in the housing market will make 2008 seem like a walk in the park.

Better to get a fixed rate now, and laugh all the way home in the future.

[Balog]

And how many times has the housing market crashed in the last 50 yrs vs. a relatively steady climb?  If we based everything in life on worst case estimates we'd all probably be hunkered in a hole somewhere waiting for the end of the world.  I think this 'ol world will keep spinning for a while so why not play the odds that history dictates rather than the oddities that Facebook perpetuates.

Brad

I'm not going to argue with a person over something they have a financial interest in promulgating, but your statement is not accurate or applicable for a large number of reasons. Blithely betting that housing costs will always appreciate above inflation in all areas at all times and never have significant setbacks that will lock you into a place you don't want to be is the height of foolishness. Realtors who push that line of BS and gloss over the very real possibilities that could contradict that are no different than the financial advisers who push ARMS. Or politicians who think they can just keep printing money and adding debt, for that matter. It's silly and irresponsible, but sadly also standard SOP in the industry.

[Fitz]

Thread drift

In December I'll have a real nice house in King George, VA for sale

[Brad Johnson]

I'm not going to argue with a person over something they have a financial interest in promulgating, but your statement is not accurate or applicable for a large number of reasons. Blithely betting that housing costs will always appreciate above inflation in all areas at all times and never have significant setbacks that will lock you into a place you don't want to be is the height of foolishness. Realtors who push that line of BS and gloss over the very real possibilities that could contradict that are no different than the financial advisers who push ARMS. Or politicians who think they can just keep printing money and adding debt, for that matter. It's silly and irresponsible, but sadly also standard SOP in the industry.

If you want to argue real estate market financials with Dame History, be my guest.  I don't think you'll sway her much.  Take the market over any 30 yr period in history, even the Great Depression, and the trend is always up.

You're trying to base an overall decision on the exception rather than the norm.  That's like basing your retirement on winning the lottery. Is it possible? Yes. Is it probable? No.

Brad

[birdman]

If you want to argue real estate market financials with Dame History, be my guest.  I don't think you'll sway her much.  Take the market over any 30 yr period in history, even the Great Depression, and the trend is always up.

You're trying to base an overall decision on the exception rather than the norm.  That's like basing your retirement on winning the lottery. Is it possible? Yes. Is it probable? No.

Brad

Because the population grows, and we have had steady enforced inflation since then.
OTOH, knew could say that since the -average- mortgage payment as a fraction of per capita average GDP has grown over the same timeframe, while the average equity has dropped, that the entirety of that rise (especially the last 30 years) is due to people wanting something they can't really afford, and driving up prices accordingly.  Hence, the sensitivity I'm referring to for the future CANT be argued against by looking at past data and saying "it hasn't gone down", because the situation the housing market is in w.r.t. Both leverage and relative payment size has never occurred before.

[roo_ster]

Real estate market in my metro area has not taken a big hit since the 1980s.  Since then, in a booming metropolis growing by leaps & bounds, the climb in home values roughly mirrors or barely beats inflation.  Thus, it has the reputation as being "affordable."  The latest real estate insanity did not hit us hard, just prolonged the selling process from a week at asking price to a month or two at asking price.  Just had a re-appraisal late last year for a refinance deal and after doing the math, our house value just about kept up with inflation.   And there are no more houses being built this close to the desirable part of the metro area.  I would not like to have to pay cap gains on an asset that had no real gains (after inflation). 

Unless there is no other option (think 1980-ish with a  prime rate of 21% and no fixed rates available) or a very secure job with relocation benefits, an ARM is likely a poor choice.

As for the future of the economy, I also am not optimistic.  The PTBs are re-inflating the real estate market with funny-money POS loans to poor risks and printing money like gangbusters.  Reasonably, it seems like it must end in tears.  But, most economic prognosticators have predicted 7 out of the last three downturns, so there is that.

[grampster]

I think ARM's should be banned.

[Brad Johnson]

I think ARM's should be banned.

I have some friends with an adventurous 2 year old who wish they were at least detachable. 

Brad

[AmbulanceDriver]

Grampster, won't go so far as to say they should be banned, but the percentage of the population for whom they are actually a *good* thing is a very tiny sliver of the number that's actually out there.  Too many people used them to buy way more house than they could afford, thinking, "oh, I'll just refinance before the rate adjusts."   The way I look at it, unless the mortgage broker is someone I actually trust, if they're pushing something, I'm gonna give it a *really* in-depth look before I agree to it.

[Ben]

Grampster, won't go so far as to say they should be banned, but the percentage of the population for whom they are actually a *good* thing is a very tiny sliver of the number that's actually out there.  Too many people used them to buy way more house than they could afford, thinking, "oh, I'll just refinance before the rate adjusts."   The way I look at it, unless the mortgage broker is someone I actually trust, if they're pushing something, I'm gonna give it a *really* in-depth look before I agree to it.

All that right there. While I would not normally recommend them, they can be advantageous in specific cases. I normally did 15 year mortgages, however on the place I'm in now, I did a 5/30 because I knew that in 5 years I would either have a new duty station, or that I would be here for a good long while. It turned out to be the latter, so I just paid the place off at the five year mark ( I bought it at pretty much the bottom of the market in 1997). Had I moved, fed.gov would have paid expenses, so it still would have worked out.

As pointed out though, too many people take these in order to get into a home they can't afford. In fact as I recall back when I did mine, there was one kind that had extremely liberal "proof of income" requirements, which really helped to give all of them a bad name, because you could practically be on welfare and get a freakin' $250K loan, which the people that did, fairly promptly defaulted on.

As for housing prices, I look at them similarly to the stock market. I've owned income properties for nearly 30 years now. While there have been dips (some of them doozies), everything has recovered over time and there's nothing I can't sell for well over what I paid for it. Had I been a house flipper or similar, things might not have worked out so well for me. Very similar to the stock market. Just take a look at the long term Dow chart. If you have time and stay invested in a diversified manner, you do well. If you day trade or get out at every correction, you're better off keeping your money in a 1% savings account. The house flippers and day traders that do well and have TV shows are a very small percentage of the overall population that try those endeavors, and generally don't do well.