A Musical Introduction:
"Should I Stay or Should I Go"? ... by the CLASH
double-click -
http://www.last.fm/music/The+Clash/_/Should+I+Stay+or+Should+I+Go
Depending on your financial scenario, you may have more than one option to consider for your home financing ... and that's good. Being in this situation is actually an envious one. Before you make this important final decision regarding financing programs and rates, gather all the information and facts you need ... ask questions.
To help you in your decision I have provided two different scenarios to consider below. Read the explanations and do the math in each scenario. Put yourself in the same place as these potential buyers. See which program option might work for you ...
The Scenario:
A young woman. Unmarried. Buying her first home. Planning on staying in the starter home 5 years, or less. She qualifies for both a FHA 30 Year-Fixed Mortgage and a 5/1 ARM (Adjustable-Rate Mortgage).
Here are the numbers:
- FHA 30 YR Fixed-Rate 4.5 % $150,000 = $760.03 P&I
-
FHA 5/1 ARM 3.75% $150,000 = $694.67 P&I
Net Difference: $65.36/month
This young woman, could pay down higher-rate credit cards, save the equivalent of her monthly Insurance Escrow payment, or qualify for an additional $13,000 in buying power if she decides to utilize an ARM loan for her financing.
The Scenario:
Young Man. Now Married. Baby on the way .. wife will be taking a short maternity leave. Job has changed also. I've heard bad things about ARM's. Am I screwed?? And what happens to my payment?
Answer:
No. Not at all. Remember, your interest rate cannot change during the five year term of the loan. And, your ARM loan is not due and payable at the end of the 5 year term ... it simply "adjusts to market conditions at the time".
During that 5-year time with an ARM loan, you have saved $65+/month, or $780+/year, or $3,900/5-year term ... over the costs of the 30-Year FHA Fixed Rate Loan talked about above.
After the initial five year term is up, your worst-case interest rate scenario increase, per year, is typically 2% above your initial rate ... and as of today (8-30-2010), that means your new rate would be 5.75%.
At a 3.75% rate, your payment is $760.03. At 5.75% it rises to $875.36, an increase of $115.33/month. But look at these comparisons for a period of 1 year:
- $115+ X 12 months = $1,380 (Increase amount per month X 1 yr)
- $3,900 - $1,380 = $2,520 (5-yr Savings minus 1 yr @ Increased Rate)
This Scenario's Outcome: You have at least two+ full years of increased interest rate that you are still "in the black" and have been saving money by taking out the ARM loan.
Summation:
Let me stress this point, ARMs are not for everyone, nor can every Mortgage Originator adequately explain the pros and cons of Adjustable Rate Mortgages.
While listening to the details regarding ARMS, keep an open mind. Ask yourself this basic question ... "Where do I think I will be in 5 years"?
If you're not sure, my suggestion is to be cautious. Pass on the ARM loan. "Lock-up" that Fixed-Rate loan. It's still a fantastic rate!
But, if your plan is to move on within five-year's time, either because of a job transfer or changes coming in your life ... don't "overpay" on your mortgage. Save where you can and secure an ARM loan.
For Extra Information Regarding ARM Loans:
Contact me! Direct: 815.277.4036 Cell: 708.921.6331 - or - write me @: gene@chicagobancorp.com
Or go to the Federal Reserve Board site, http://www.federalreserve.gov/pubs/arms/arms_english.htm, and order your "Consumer Handbook on Adjustable-Rate Mortgage" (CHARM) booklet.
Call or Contact Me For Loan Information Today!
Gene Mundt, Sr. Vice President
Personal NMLS #216987
The Federal Savings Bank
1823 Centre Point Circle, Naperville, IL 60563
Skype! 630-219-1316
Gene,
I think this is a very good post and I "suggested" it. The problem with ARMs is that we expect great changes, and are trying to make a better deal today, but then turns out that all big plans do not pan out and now we are in trouble.
That what happened to so many people
Jon: Timing and over-zealous prices had something to do with it ... but I understand your concern. It's why I point out that they need to be fairly certain of their intentions and ability to move on within the five years. For those that meet that criteria ... it's something to think over and consider. Thanks for suggesting the post, Jon. It's appreciated ...
Gene
Gene - If I'm in the market for a mortgage now, I'll stay with the fixed rate which is very low. Couldn't get any lower than it is now.
Rosalinda: After considering your personal financial scenario and circumstances you have decided that the fixed-rate is the best option for you ... that is certainly what you should pursue. You're absolutely right ... the rates are fantastic .. and who can imagine them getting muc lower? But for someone that knows their personal scenario will call for transfer or great change in circumstances ... an ARM could be a good option for consideration. I know that ARMS have a bad name right now ... but it's not the product, but the way they are used that should be questioned. Food for thought ... Thanks for writing your opinions ...
Gene
As usual, a great explanation. Simple and concise. Gene and I am reblogging.
Gene - You are so right that it's not the loan product that is to blame for what happened to some people but rather the way it was sold and the way it was used. I too agree that a 30yr FRM is not for everyone just as a 5yr ARM is not for everyone. Not every buyer has the same situation and fortunately, there are still a few different products left to serve different needs. Great post Gene.
Gene, that is a great comparison for home buyers.
Jane: As always, you're kind. The re-blog is greatly appreciated too ...
Donne: Yep, I agree. Loans and people's needs should be matched. It's all about personalization today. And, as you point out, we're lucky to still have a few programs to accomplish that with.
Damon: I tried to keep it fairly simple ... easy to understand. Everybody needs to be aware of their pennies today. If they can be saved safely, it's something to seriously consider. Thanks for writing Damon.
Gene
Good morning Gene,
This is the best presentation I have seen! Your side by side comparison is awesome. Thanks for taking the time to put it in layman's terms!!!
Gene - I think you worked hard on this post and it is perfect to help people understand how to properly use an ARM product. Some people think ARM loans are bad but in reality it's the lack of proper guidance by inexperienced loan officers that causes ARM loans to become troublesome. As you highlighted your specific scenario dictates the need for a fixed product or adjustable. I am suggesting this for feature. Great job!
Gene, you're one smart guy. Being able to explain the different uses for different producs in a simple fashion isn't easy, but so very valuable. Suggested.
Excellent post. A lot of folks don't get that the '5' in a 5/1 arm is the number of years the rates won't change. We got a 5/1 arm on a rental property, and worried what would we do when the rate went up? Well - you probably guessed it - it didn't go up, it went down! We are now setting aside the 'extra' amount of rent we get above the payment.
This is a great clear comparison of these two loan options. I am glad to see someone defend the ARM, it really is best for some people. Re-blogged!
Gene I understand in principle the goal of the ARM and everyone here is right: you did a great job of breaking it down and I don't doubt that the ARM is viable product.
But I will say that an ARM is a viable product for people who regularly assess their finances and plan their future beyond how they are going to furnish that new house. I believe that part of the problem with ARMs in the recent past was that once people signed on the dotted line, they never looked back and did not plan for the adjustment in the future. It wasn't that nobody told them that their rates might increase. They simply forgot because they failed to properly plan for it.
So again, I think this is a viable option for people who are always cognizant of their financial ability and for those who have the patience to properly set goals and consistently make plans to achieve their objectives (ie put that savings in a bank or CD instead of a BMW).
Sorry Gene. I've hijacked more posts today than I care to admit.
Gene, I'd suggest this but I'm too late. So I "liked" it!
Kate
Gene: You obviously spent some time doing this comparison, and for that I commend you. But I disagree in your assessment that "if you KNOW what you're doing in 5 years, get the ARM" (paraphrased a bit).
My feeling is that, more today than perhaps in anytime in history, people cannot possibly know where there life situation will be in 5 years. In the past, maybe they could make a good guess if they were serial planners. But now? No way!
So, I think it is irresponsible to even consider an ARM. And, really, how many people are funding them anyway?
Hi Gene, I enjoyed your review of the options and consequences of each. Interesting, please keep them coming.
Ah music to my English ears! The music part that is. The rest is a great explanation and I wish many loan officers would sit down with their clients and show them this kind of detailed information so they can make informed decisions. I am going to re-blog this.
Gene: Thanks for taking the time to lay out the two scenarios. I appreciate it. This is great information for every borrower! Take care.
Very helpful... It's always easier to see things when put in real life scenarios. Will be bookmarking this!
Gene, very creative. I like the format you used here. The music was nice too.
Hi Gene,
These are such turbulent times. Borrowers are often thinking "how long am I going to stay here" when making this type of decision. They are also thinking "What are my finances likely to be in five years." Sadly - given the turbulence of our times, this is a serious problem. Five years ago I refinanced. I was in the middle of securing a job as a professor and was going into real estate to supplement a transition that was going to take several years.
Well - both the real estate market and the appointment as assistant professor went south at the same time. I'm working now full time as an agent and adjunct from time to time. But my future was very unlike anything I imagined. With what used to be stable careers being outsourced and employement scarce for anyone over 40 who is looking - I would looking for the most secure position. Interest rates are bound to go up significantly in five years. Unless I KNOW that I will be moving before that time is up - I would not do an adjustable anything right now.
Gene ~ thanks for that very well-written and clear explanation about how ARMs can offer a buyer some initial benefits. Buyers need to investigate several options and your example clearly shows some advantages. Congrats on a well-deserved Featured Post!
Hi Gene,
Great way to make a complicated matter simple, good for you, and if this mortgage thing does not pan out for you, there is a career in creating comic books for Realtors in there somewhere.
Awesome job, Happy Salling
Gene: I liked how you did the different scenarios to make your point here. Sometimes it's a little complicated & turns into a 'if you wanna do this, then we'll do this', etc. That's why I think trust is a good component to have so the buyers open up & tell you what their future plans are so you can help them plan.
Excellent summary. I think most LO's do a good job in explaining it the problem we all run into is that life happens and people often do not plan for it. Those who do evaluate things on a regular basis are less likely to be in trouble at the end of 5 years.
Dorie: Thank you for writing such kind words. I'm glad you found the post helpful and of value.
Nevin: Thanks for further clarifying this comparison and the pros and cons of ARMS in general. You're right ... An ARM program is just a tool ... and it's the individual and their personal scenario that is the deciding factor regarding their use or appropriateness. Thanks for writing ...
Lottie: Can I quote you to my wife?? I'm glad you found value in the way I presented this. Thanks for the suggestion too ...
Joetta: I'm so happy that you understand and pass on the obvious knowledge you have regarding these ARM programs ... and that you personally were able to benefit from utilizing one. I appreciate your providing this great example for everyone to read and learn from! Thanks so much ...
Coral: Thanks for the thumbs-up ... and the suggestion. What I'm trying to promote is "just a peek and consideration". If at the end of the scrutiny, a decision is made to pass ... so be it. But at least a customer knows for sure then.
Charita: It's not hijacking when you offer input of real value! And you're right ... staying on top of credit and finances is easier and more natural for some, then others. Borrowing money, especially these days, demands more time and attention than it ever has before. For those willing and capable of devoting some time and attention to this ARM consideration and their finances in general ... it may make sense. For the others, the more conventional lending programs will work better. The client must know his strengths and weaknesses ... no doubt.
Kate: Glad you "liked" it ... and appreciate the sentiment! We've started the countdown to grandbaby. We're looking forward to the big day of October 21st!
Aaron: We have funding and the capability to deliver an ARM to our customers .. otherwise this blog is moot. To clarify ... I am not promoting anyone taking out an ARM unless they fit certain more obvious criteria ... or they could benefit ... or they are totally comfortable with that decision. All I am asking is ... for the financial situations that it might benefit ... that they keep an open mind and give it a look for consideration. I would never promote or suggest any program I thought detrimental or in direct contrast to their overall financial good.
Bill: Thank you for writing your kind comments! And I will continue writing .. I can't shut up!
Corinne: Glad you enjoyed my contribution of some "retro" English pop rock. We're kindred spirits! Hoping you find some real use for the post ... and it spurs some clients into some real thought.
Paul: It's always great to get a "thumbs-up" from an admired fellow professional. It means alot ...
Caroline: Thank you! Your bookmarking this post is a great honor. Hope it helps you and your customers in the future ,,.,
Tammie: Got you boogeying, huh? Glad to hear it put some cheer in your day! Thanks for the nice comments ...
Ruthmarie: So sorry to hear that you have been experiencing such turmoil in your life. Never like to hear that. And you're right ... in your situation an ARM would definitely be an unwise move ... especially in the short term. All personal indications lead to that decision. For others, it may not be so clear ... and further analysis and soul-searching could prove differently. It's a personal decision based on personal facts.
Maureen: Thank you! Seeing comparisons can definitely help. You prove that over an over again in many of your own posts! I hope that the posts promotes consideration ... and well-founded decisions.
Peter and Linda: I'll keep your suggestion in mind!! Consider me a new "Pfann"!! Thanks for writing ...
Lyn: You're so right. I gain so much perspective when I get them to "open-up". Sometimes you find out things can provide a whole different set of options to consider. It's to the customer's benefit to take the time and talk sincerely and seriously to their mortgage lender ... and other real estate professionals. You make an excellent point!
Tricia: The current financial atmosphere definitely demands more of the attention and planning you recommend. Otherwise ... trouble. Sounds like your clients are in very good hands .. and that you devote the time and attention ... and options they will benefit from. I really appreciate your commenting. Hope business is healthy for you ...
Gene
Gene, I like your gene-ine explanation, there's a solid power in numbers, especially when put side by side!
ARM is a choice tat should be made with a lot of caution and well layed out plans, but your post justifies its pure existence. Some people literally ask: "Who in his/her right mind will EVER consider an ARM and why?"
Anna: LOL Very good .. very good! And yes, I run into that sentiment fairly often. No need to say that ARMS kindof have a bad name right now. But as Nevin pointed out above, it's not the programs fault ... but the use of it in bad or unjustified situations. I'm hoping I got the point across with this post ... and someone considers the pros and cons that might not have thought about it prior. Thanks for writing, Anna ...
Gene
Gene, I agree an ARM is not always the way to go.... it does however based on your best guess for your future life. Staying out of trouble is the goal while getting a good deal during the ARM period.
Hi Gene - You make some great cases for ARMs - and for fixed rates. There are absolutely some circumstances where a homeowner/buyer would likely choose a good ARM program over a fixed rate. I'm seeing some of the resets coming across my desk in the low 3's...of course, these are the familys whose circumstances have changed since they took these ARMs and are now afraid of rising rates in the future and are coming to me for default prevention counseling!
Gary: ARMs can be good deals ... or horrendous ones. Circumstances, financial scenarios, and program options need to be considered seriously prior to making a final decision. Thanks for writing.
Karen! Good to see you! If we only could predict the future, right? For some, ARMS have proven to have been good choices. For others? Not so. We can only make our choices after fully knowing the pros and cons of a program and considering what the knowns and unknowns are for our future. A crystal ball would help us all ... Thanks for writing Karen.
Gene
Great Analysis Gene... Lots of things to consider and you pointed them all out.
Thanks Judy! I appreciate your thumbs-up. Hope the post can serve as some assistance for a client ... and at least some fodder for thought.
Gene