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Would and ARM be right for me? Don't be so quick to say no!

 Hello,

We wanted to inform you that ARMS are very competitive again, with rates as low as 3.25%.  There are definite situations that can greatly benefit from these products. Having the right knowledge and knowing how to use them correctly is the key.

If you think that you may fall into one of these categories, please feel free to give us a call and we would be more than happy to discuss your options and give you some professional feedback on whether it is right for you. 

Just look at the difference (for illustration purposes only)

        30 year fixed:                              5/1 ARM

$221/ month Savings, which equates to $13,260 of cash flow over 5 years

This is an actual analysis written for one of our clients by a licensed MBA Mortgage Loan Officer:

 

Good afternoon XXXXXX

Thanks for discussing your thoughts with me.  Here is the informaiton we discussed and why I think the 7/1 ARM is the best fit for your particular situation.  Since you only plan on living in the house for 5-6 more years, the 7/1 is a good option because it gives you a cushion in case you cannot sell prior to 6 years.  The 10/1 is ok, but if you are looking at the 10, you might as well take the 30 year... The rates will depend on the LIBOR rate, which is currently at 1.08%.  The margin which is 2.25%, so if it adjusted today, then the rate would 3.33%.  However, we don't know what the LIBO will do in 7 years.   The caps on this are 5/2/5, meaning no greater than 5% in the first year, no greater than 2% in any other year and no greater than 5% over the life of the loan.  Sounds scary, BUT it's really not.  Think about it like this: Assuming the Average 30 year fixed is at 4.5%, or $2,052/ month bases on your estimated $405,000 loan amount. 7 year balance = $352,456/ 10 year balance = $324,361 If you were to refinance today into a 7/1 ARM:

The REWARD side:Years 1-7 (compared to 30 year fixed)Payment is $1,904/ mo which is a savings of $148/ month and a 5 year savings $8,800 For the first 7 yrs you are at 3.875%. Why does this make sense for some people?Your Balance after 7 years = $347,531 ($4,925 less than the 30 year) Assuming you send the difference in the payment between the 30 and the 7/1. You pay an additional $148/ month, and your balance = $333,276 ($19,180 less than your 30 year)  

The RISK Side:Let's say you let it adjust, which a move frequently is not played. If the first and the lifetime cap is 5% from original rate, then let's say:

Worst case scenario: The rate adjusts the entire 5% in the first adjustment and now you're at 8.875% (highly unlikely). If it were the stay at that worst case scenario for the next 3 yrs. then for first 7 yrs you were at 3.875% and last 3 years you were at 8.875% meaning worst case scenario your average rate was 6.375% over ten years, with the opportunity to pay a lot more to principle over those first 7 years. Your balance at the end of 10 year is $331,260, which is not that far off the 30 year balance, and you were able to pay it down rapidly over the 1st 7 years. AND THAT JUST THE WOST CASE!! 

Best case scenario: You start at 3.875% and the loan drops to 3.25% after 7 yrs (Also not very likely, but has been happening lately). Knowing that the rate may change every year at this point, but not by more than 2%, then you know you will go from 3.25% (8th year), to 5.25% (9th year), to 7.25% (10th year). Your 10 year balance is around $318,653 which, once again puts you in front of the 30 year term. 

REALITY:

With something in the middle being realistic, as you can see with these numbers, ARM's (when properly understood and used), can be a tremendous advantage to the consumer.