During the happy days of the real estate boom in the early 2,000’s, along Scenic Hwy 30a, many people made the mistake of using adjustable rate loans to finance purchases in order to secure a lower, sometimes much lower, monthly payment. As the market began to crumble, interest rates climbed and many people found themselves with payments they could not afford. Unfortunately the result was distress sales at severely reduced prices, short sales or even foreclosures. Needless to say, adjustable rate mortgages got a bad rap after the housing bust on 30a!
In the years since, banks have tightened their lending standards to ensure that borrowers who apply for adjustable rate loans, or ARM’s, can qualify for, and afford, the rate reset and increase in monthly payments. We are experiencing a slow climb in interest rates once again and the ARM’s are becoming attractive once again to buyers seeking the lower monthly payment. Mortgage rates have risen almost a full percentage point from the rock bottom lows of a year ago. At the same time, we are seeing the spread between adjustable rate loans and fixed rate loans widen. As of the end of April, 2014, the average rate on a 30 year fixed rate loan stood at 4.33%. By comparison, the average rate on a 5 year adjustable rate loan stood at 3.03%! This creates the temptation to pursue the ARM rate instead of a fixed rate loan.
Here are some things to consider when making your choice: Fixed or Adjustable Rate Mortgage when buying on 30a:
1) LENGTH OF OWNERSHIP… Banks typically offer adjustable rate mortgages for 5, 7 or 10 years. After that initial period, the loans will reset at a higher rate (usually) and sometimes multiple times. It can make good financial sense to use an ARM when you don’t plan on owning the property any longer than the initial rate period of 5, 7 or 10 years. If you plan on owning for an extended period of time, the fixed rate mortgage is the way to go.
2) LENDING REQUIREMENTS… Banks typically don’t hold mortgage loans (in house) for very long. They will sell them to private investors or on the open market to FANNIE MAY or FREDDY MAC but to do so they must follow strict standards when qualifying a borrower for an adjustable rate loan. These standards were tightened even more when the market crashed and defaults on these loans skyrocketed ! Today, banks evaluate a persons ability to re- pay based on the higher “re set” rates instead of the rate when the loan is made. The standard debt-to-income ratio for most of these loans is set at no higher than 43%. There are exceptions to this rule for borrowers with high levels of income or asset levels that can cover the amount of difference in the ratio.
3) PAYMENT PREFERENCES...ARM’s always offer the borrower a lower monthly payment than a fixed rate loan. This gives you the option of using the difference to pay down other debt or gain a return by investing it. Borrowers who are looking to secure a lower monthly payment just to qualify for the adjustable rate will almost always be denied in today’s lending markets. The 30 year fixed rate will give you the security of a constant payment amount that will never increase during the life of the loan.
When making your choice: Fixed or Adjustable Rate Mortgage when buying on 30a, all of these options should be discussed with your lender. A good, established mortgage lender will steer you toward the best loan package based on your financial situation and your intentions once the property becomes yours. Here on 30A, we have great relationships with the best local lenders and are happy to get you together with the right lender for you.