The New ARM and fixed products
The mortgage industry is slow and new products take time. There are basically
only two types of mortgages, the ARMS and the fixed products. The ARM products
came out 20 years ago and they were initially complex and confusing. They
were not popular initially for they had no caps. Over the years, many mortgage
products came and went, but Arms remained. About a decade ago, the new low
payment rate ARM'S hit the market and have been a huge hit with the public.
It allows lower payments for five years preset.
The logic is simple: most people only own a home for seven years and
they are typically going to refinance or move either way. If this is the
case, why have a back end loaded 30 year loan? In five to seven years,
arms and the starter rate products will still be in demand based on the
growing trend. This product has a neat little feature that allows you
to go back into the starter rate any time after three years, so the client
has that to fall back upon. The starter rate has always historically been
below prime and with the bi-weekly feature, based on CURRENT rates; your
balance actually goes down faster than a 6.5% fixed note after five years.
It's all about the math.
The patented Bi-weekly feature, which is offered with the 2.95% product,
is totally unique and helps make the program accelerate more. Instead
of holding the payments until the end of the month, like all other bi-weeklies,
they apply it to the books twice a month. All other bi-weeklies hold the
funds until the end of the month and make interest off your money. There
is a substantial difference as to how fast your balance will go down.
A lower balance is important and with this type of bi-weekly, the balance
reduces faster. It's not how much you pay, but how the money is applied.
In short, there is no such thing as something for nothing and you have
to look closely at a computer proposal comparing your current note to
the fully indexed note rate and then examine the balances at the end of
each year. If you understand the stability of the indexes, you will see
why many are deciding that this type of mortgage makes more sense. It
allows you to control your own cash flow.
Rates are always an issue, but look closely at a historical table for
the last ten years. It has been a long time since we have seen double
digit rates and this one of a kind adjustable is more attractive than
other adjustables that have a 2% a year rate increase cap and a 6% lifetime
cap. Almost all ARM lenders sell their paper as fast as they can, because
the index they use is not as stable. These two lenders have confidence
in their Index and never sell their paper. This is why there is not a
2% increase rule, but instead a more attractive payment cap feature, which
is better for the consumer. The payment can never increase or decrease
more than 71/2 % per year for the first five years and typically the full
index rate is reached the fourth or fifth year.
Rates look flat for a very long time for a variety of reasons. The economy,
not to mention the bubble in the real estate market, would have a hard
time if rates were to climb to any degree. In short, there are not a lot
of good economic reasons to take a long term fixed rate product unless
you are going to pay off the note undisturbed. If a client simply took
all the saving and prepaid the principal directly, you have a win/win
situation that mathematically outweighs the minor risk factor of rates
going up. Consult your loan officer for details.
People today are demanding flexibility and options. Remember, your mortgage
is a kind of reverse investment. Like any investment plan, you should
have some idea of how you want or need your investment to perform over
a period of time in order to reach your goals. There are many investment
options, each performing differently, each with different risks and rewards.
Just as the right investment for your needs can make you money, choosing
the right mortgage for your needs can save you money, and lots of it!
