Despite their stigma, adjustable mortgages can save borrowers big bucks
By Jeff Lazerson
Plenty of people are afraid of adjustable-rate mortgages or ARMS. Yesteryear’s toxic adjustable rate mortgages ruined it for millions of unbeknownst homeowners. Balloon payments, rate and payment shock, prepayment penalties, negative amortization, and no-qualifiers all contributed to the mortgage meltdown and the Great Recession.
While it was millions of foreclosures too late, the government came to the rescue with real consumer protections for all home loans, via Dodd-Frank.
To this day, most mortgage shoppers are not aware that balloon payments, prepayment penalties, negative amortizing loans, and no-qualifiers are all banned.
A typical adjustable will be locked for some period of time such as five, seven or 10 years and then adjust annually for the remaining life of the loan.
OK. ARMS are safer than they were. Either way, why not just stick with fixed?
Fixed-rate mortgages are just fine. But, on average, borrowers keep their mortgages from just seven to nine years.
Borrowers with fixed rates pay more to be assured of the payment stability. Yet, most don’t keep that mortgage long enough for that to come into play compared to a 7-year adjustable, for example.
A 7-year adjustable at a 2.875 percent rate on a $424,100 loan has a payment of $1,760. An equivalent 30-year fixed has a rate of 3.625 and a payment of $1,934. That’s a payment difference of $174 per month or $14,616 savings over the first seven years that can be applied to principal reduction.
Take a jumbo $750,000 loan. The 7-year at 2.875 percent has a payment of $3,112. The 30-year fixed is a full point higher at 3.875 percent, carrying a payment of $3,527. That ARM savings is $415 per month or almost $35,000 over seven years.
Something else that you need not fear is the payment adjustment, should you keep your adjustable that long. In my experience over the last 10 years, most of my clients told me the interest rate decreased or stayed about the same as it was during the locked period.
“It’s a reasonable product for good financial managers,” said Doug Duncan, Fannie Mae’s chief economist. “I have an adjustable-rate mortgage.”
Starting July 29, Fannie Mae is allowing as little as a 5 percent down payment on its high-balance ($424,101 to $636,500) Orange County adjustable-rate mortgages. Fannie currently requires 10 percent down on its adjustable high-balance loans.
First and foremost, you need to be able to sleep at night. So, if an adjustable makes you nervous, just say no. If you see the savings benefits for yourself and your circumstances, just go for it.