Better get a big bar of Lifebuoy soap out and cover the children's ears ... I'm going to use an ugly ... dirty ... word!
ARM! See? Told you it was going to be filthy!
ARM ... As in Adjustable-Rate Mortgage ... is probably one of the biggest, ugliest, and most dirty words in real estate over the last 4 to 6 years.
But, I'm here to tell you ... saying and using this word can be GOOD! Keep an open mind now when I say this ... but it's not the ARM program itself that is so evil.
It was how the program was utilized at times during those years that have made the word and program so detested and feared now. As with almost anything, if used improperly or for the wrong reasons ... bad things can be the result. With ARMs, that was definitely the case.
But, below is a clear-cut example of where keeping an open mind ... and utilization of an ARM proved extremely beneficial monetarily to RECENT clients of mine. Circumstances may exist where it could prove helpful to you or others as well. The points that determined the lending program they decided upon were these:
- During the thorough discussion of their mortgage/financial options and a review of their future plans, I discovered that my clients were positive that their new home purchase was going to be of a short duration. The purchase they were making was not to be long term ... and definitely shorter than 5 years.
- At the time of our discussion, the fixed rate was a full percent higher than the rate for a 5-year ARM. (Other ARM and Fixed Rate loan terms and loan programs exist. Make sure you ask/discuss them.)
- At the amount my clients' were borrowing ($260,000), the savings realized when borrowing and utilizing an ARM was over $150 per month.
- That savings per month equates to $1,800+ per year ... and $9,000 in savings over the life of the 5-year ARM.
- These clients were also able to qualify for and claim the $6,500 step-up home buyer tax credit.
Upon the advice of their agent, these clients immediately placed the sales price of the townhome they were selling at a reasonable amount where it "could sell". It did ... just as their agent knew it would. And because they listened and acted upon their professional agent's and lender' advice ... they were able to take advantage of gr
eat monetary benefits.
$150 Savings per Month! A Quick and Efficient Sale! $6,500 in Tax Credit Benefit! Thousands in Savings Over the Life of Their ARM Loan! An ARM Loan brought the "muscle" to this transaction that these clients needed.
And they didn't even have to put soap in their mouth!
The point I want to make here is ...
LISTEN to the professionals involved in your transaction. Hold discussions with them. Heed and consider their advice. Keep an open mind. Remember, what didn't work well for someone else, may be the best answer and option for YOU! Weigh all your options. Then ... move forward with your educated decision.
Gene Mundt, Sr. Vice President
Personal NMLS #216987
The Federal Savings Bank
1823 Centre Point Circle, Naperville, IL 60563
Skype! 630-219-1316
Hi Gene~ That is the key thing! It may work for some people in certain situations. It is never a one size fits all type of thing!
I thought ARMs were not even being offered at this time - but it sounds like under the right circumstances, they work very well.
Vickie: Most definitely! Taking the time to figure out what the best route is ... that's what ultimately important. That paired up with open-mindedness and common sense. Thanks for writing!
Margaret: ARMs are still out there. I think they get down-played because of the bad connotations surrounding them. But, they still can be a valid and good option, if used properly and discussed thoroughly. Good to see you, as always ...
Gene
Gene - I never thought an ARM was a totally bad product, it is all in making it work the way it was intended.
Susan: Those of us within the real estate industry most likely realize that. The media definitely demonizes this product ... without placement of any asterik anywhere regarding the common sense approach of using it. I just don't want the future borrowers/public to dismiss what could be a very helpful product for them to at least consider. I really appreciate your taking the time to comment.
Gene
Gene - AMEN!!! It's not the product, it's who it was sold to and why. Selling an ARM to someone who didn't have a short term plan is bad planning. For those with short term plans and goals, an ARM is probably the right product. Good post Gene.
Thanks Donne! Exactly why real communication between lender and client is so important. Everyone needs to slow down ... and just talk through things. It probably would help more than anything other single thing ...
Good to see you ... and thanks for the compliment!
Gene
Gene, Okay, I am probably throwing myself under the bus, but here goes: IMHO, there is no such thing as a bad or toxic mortgage product. There is a bad time to use it, the wrong clients to offer it to and mortgage people "selling" a product instead of consulting......but not the product.
Case in point: World Savings (formerly GoldenWest) and Washington Mutual (who bought out the likes of American Savings Bank and Great Western Bank) both offer the option arm for many, many years prior to the meltdown over the past few years. The terms of the loan were pretty much what everyone was offering in the mid-2000's EXCEPT the product was not available to every loan officer who had a business card.
The loans were usually portfolio product (not sold on the secondary market) and utilized make sense underwriting guidelines. Max LTV was generally around 65%. And, of every 20-30 loan officers there were probably one or two of us who knew the product well enough to educate our clients about the loan. It was a PERFECT loan for a financially savvy individual/business owner who had fluctuating income and knew how to manage money. An added plus was that the loan was paid bi-weekly (at the bank, not a third party vendor scam) and the loan re-amortized every two weeks.
Trouble began with the secondary marketing world decided to get into this product and it was open to all mortgage peeps........and they added the carrot of the 1% start rate with the 3 and 4 point rebate on the loan. Downhill from there........
Sorry for the long comment....it is great when consumers will actually listen enough to be fully educated when they buy a home. Great post!
Gene, thanks for writing this timely blog! I have a lot of Resident Doctors in my market that move here for 2-5 years and then move away. This can be a great product for applications such as this. Consider yourself reblogged!
Deborah: It's obvious you have a real grasp of the actual problems as they existed ... and how they effect today's market and clients. I agree with you when you say it's not really the product that is to blame for the problems that resulted from these past events. It is how they were utilized ... and for what purposes. I believe you picked-up on the real message I was hoping to convey with my article. I also believe that you and I share similar goals as to how we service our customers' best interests.
Your posts (and comments) have been a pleasure for me to discover Deborah. Thank you ... and please feel free to continue your "long comments" in the future ...
Gene
Damon: Sounds like the ideal situation for this product. I hope you are extremely successful in promoting its use. Thank you for the re-blog ...
Gene
Gene, when used as it was designed for, it was and is a good product.
Great example Gene! In Canada we still use ARM's all the time and as long as they are properly "prescribed" by the lender they are a good tool.
Thanks for sharing this info!
William: I appreciate your open mind regarding this product. It definitely helps when the lender and the agent are "in tune" regarding the options their mutual client should consider. You are definitely correct when you say the product can be good. It just need to be a good and right fit ...
Harry: Love the word "prescribed"! Perfect analogy of what mortgage lending has become. I think I'm going to add "Doctor of Mortgage Lending" to my business cards from now on!! Thanks for taking the time to write ...
Gene
Gene: Although most of my loans are 30 year fixed, I do the occasional ARM. Thanks for the post. I think it's always important to have a discussion with your client about what they're looking for. An ARM can make perfect sense for a shorter ownership period or, for that matter, a bigger loan. Thanks again!
Paul: I appreciate your stopping by! As you point out, any good lender knows that having a in-depth "discussion" with your client ... or a few "discussions" ... is vitally important to the success of the current transaction and the client's overall financial picture. An ARM is just one thing to consider possibly discussing if the scenario might be a good fit. Thumbs up, Paul!
Gene
Hi Gene! Yes, the pendulum has swung to the far side and there are those who will refuse to consider that there may be value in some of the mortgage instruments we have relied on when used properly. The clients best interest should always be the point! Have a great day!
SarahGray! Good to see you! And yes .. you nailed it on the head. The client's best interest should be our compass in any transaction. A very important and valid point ...
Gene