Rates have increased quickly over the past two weeks following the election. There are two reasons for the increase: a market reaction to what a Trump presidency may bring, and a market reaction preparing for a Fed rate hike. It’s normal for rates to rise when there are two significant events occurring in such a short period with each other. As I said in last week’s post: Don’t panic. At a quick glance, rising rates do seem like a negative thing. But that’s not necessarily so. There are positives. Let’s take a look.
First, as the talented and very well respected real estate agent, Chad Taylor of Taylor Made with Keller Williams, recently posted, the housing market is starting to shift into a more balanced position. Rising rates can accelerate that shift which can be good for buyers for many reasons — namely, more inventory to choose from, less buying competition and lower price points. Rising rates can affect buying power so sellers most likely will not be able to list homes at premium price levels if prospective purchasers have lower buying power price points.
Second, adjustable-rate mortgages (ARMs) will gain popularity … and that’s not a bad thing. Most people fear ARMs and most of that fear is fueled by the ridiculous ARM programs banks like Countrywide and Washington Mutual created before the housing crisis. Those products were terrible as they had pre-payment penalties and negative amortization (deferred interest unpaid added to the existing loan balance). Those products, and banks, are gone. The ARMs I’m referring to are the traditional products like the 3/1, 5/1, 7/1 and 10/1 loans. These products are pretty cut and dry which makes them safe if clear expectations are set. I’ll explain.
The ARM loans mentioned above have initial rates fixed equal to the top number referenced and can change one time a year, as referenced in the bottom number, following the expiration of the fixed period. For example, the 10/1 ARM has a rate fixed for 10 years and then can adjust one time a year following the completion of the initial 10-year period. The ARM rate adjustments have a cap restriction per year as well as for the life of the loan. These caps usually are 2 percent per annual adjustment and 5 percent for the life of the loan. Rates offered on ARM products are generally about 0.75 to 1 percent lower than a 30-year fixed term. These are lower because most borrowers that use these loans won’t keep them for the entire life of the loan so they are classified as short-term products.
The average homeowner changes mortgage loans about every five years. This is the result of owners either refinancing an existing mortgage loan or buying a new home. So, in consideration of this, a 7/1 or 10/1 ARM product isn’t necessarily scary. The ARM products of today don’t have any gimmicks. Borrowers need to understand the possible rate adjustment details in addition to having a realistic plan of how long they plan to keep they home they are in. ARM loans are available for both purchase and refinance situations. I’ll dedicate an upcoming post comparing an ARM product to a fixed product to help visualize the financial impact. If rates really are finally rising, ARMs will gain in popularity.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268