Financial Advice

This article is to help anyone who does not understand the full scope of an Rate Change loan. I have never advised my clients to obtain an Adjustable Rate Mortgage over a Fixed Rate Loan. If the client wanted the product and they were knowledgably about and understood that the interest was going to fluctuate from the initial rate; I had no choice but to give them their wishes. I have been in mortgage lending for 30+ years and have worked in origination (loan officer), underwriting and operations so my knowledge is that most people do not have a full understanding of the ARM loan. ARM changes are complex and have to studied even by the loan officer. If they cannot give your answers you probably need to see further.

It does not mean that it is never a necessarily bad product, and there are times it can be beneficial but for the average client it may not be. I do not recommend ARM loans for the person who is in a habitual income situation in which they do not see significant increases in salary and who intends to stay in the home for an unspecified amount of time and especially to just be able to buy the home.

The interest rate simply put, will not stay the same for the life of the loan. I am very adamant about this due to the following: I have seen borrowers get loans with interest rates in the 3% range. But, guess what; their rate changed every 6 months, sometimes after the first six months and sometimes after the first year, depending upon the type ARM product it was. They did not understand or have a clue that this Libor ARM sometimes fluctuates every six months. Yes, it is the obligation of the Loan Officer to inform their clients. Some of these were called the Libor ARM. The client’s income did not rise, but the ARM rate and payments did. I am repeating this over and over I know but an ARM loan rate will change and sometimes frequently.

My recommendation to any applicant is to make sure you know exactly what type ARM you are getting, when it will change the first and then thereafter. You should get an ARM disclosure which is required by RESPA. It is the Loan Officer’s responsibility to Answer questions.

ARM loans can be helpful for someone who is transferred with their employer on a regular basis, every 3 to 5 to 10 year period; therefore you have the convenience of the lower rate until you pay off the loan when you sell you home. ARM loans always adjust from that initial rate and if the market changed drastically, the payment changes drastically also. Normally the adjustments for each period have caps so that they cannot rise above one to two percent, depending again on the product.

FHA (Federal Housing Administration) 1 & 3 year hybrid ARM loans have an adjustment of 1% after the first change date and a 5% life of loan cap. The 5, 7, & 10 year hybrid ARM has a 2% initial rate adjustment, after the first change date, with a 6% life of loan cap.

FNMA (Fannie Mae) ARM Products are 1 yr adjustable, 3, 5, 7 & 10 year adjustable loans. These ARM loans are with 1% to 2% after the initial adjustment period and life caps from 5 to 6%. The 7 year (fixed for 7 years) & 10 year (fixed for 10 years) ARM loan can have an beginning rate increase up to 5%. The latter 5% would really make a big difference in your payment!!!! This is not what I would call a product for the averageAmerican. As I have stated, each situation is different, therefore this might be a product you could afford, if you know your earnings will increase to afford the much higher payment.

There are plenty of reason people choose ARM loans. It is an initial lower rate of interest and payment which may be helpful in some cases to allow a borrower to qualify for the loan. Again, it is the Loan Officers responsibility to make sure they are giving the client the best type loan that will be of value to them down the road and not just something to get the loan done. This has happened in the past and it is not to the client’s advantage. My advice is to be informed at all cost. Ask questions and get answers.