A “Hello” to ARMs?

How the once avoided ARM may be a smart move for homeowners

A Brief Description/History of ARMs

Adjustable Rate Mortgages (ARMs) are loans that- at some point in the term- have an interest rate that is not fixed (30-yr loans and 15-yr loans have interest rates that are fixed for the life of the loan).  Most ARMs start with a period of time- usually 5-10 years- where the rate is fixed, but is allowed to vary after that period.

Why would anyone want a variable rate mortgage?  The reason is that ARMs with a fixed term often start with an interest rate that is significantly lower than the going rate for 30-yr and even 15-yr loans.  The savings accumulated over the fixed term can be substantial.

ARMs used to be quite popular.  During the housing bubble (from about 2003 – 2007), ARMs were almost as prevalent and 30-yr fixed rate loans, because they offered affordable payments when home prices kept shooting up.  However, some ARM products were just…not good…and were used/sold inappropriately.  For example, the infamous Option ARM offered a “teaser” rate in the first year, but after that, the mortgage balance actually increased each month.

After the crash, ARMs became quite unpopular and- due to increased regulation- didn’t really provide much benefit.  In fact, until recently, ARMs had higher starting rates than 30-yr mortgages, so it just didn’t make sense to get one.

The Rebirth of the ARM

As the economy has been improving, interest rates have been rising.  Since the November election alone, mortgage interest rates have increased almost 0.75%, and there appears to be no end to that trend.  In order to keep selling loans, lenders have made ARMs significantly more attractive.

Note that a the part of the ARM description is the period of time for which the rate is fixed (so a 5/1 ARM would be fixed at the starting rate for 5 years).

	30-yr Fixed	5/1 ARM	7/1 ARM	10/1 ARM
Interest Rate	4.250%	3.375%	3.625%	3.875%
Payment ($200K mortgage)	$984	$884	$912	$940

Notice the savings of a 30-yr compared to an ARM: the payment difference is as much as $100, in this example.

Should You Consider an ARM?

An ARM may be the way to go if you fall into one of these categories:

·         You’re confident you will only have the mortgage for around 7 years – Studies show that Americans tend to move every 7-9 years and refinance every 5-7 years.  If you think it’s quite likely that you’ll do one of these, then an ARM may be a smart move.  Note that even if you had to stay into the variable period of the mortgage, and your rate increased 1% each year, you would still see a net benefit for even 3 years after your rate adjusts (let us know if you’re interested in seeing “the Math”).

·         You’re confident that rates will decrease – This is a questionable conclusion in this market (most experts agree that rates will continue to rise for the foreseeable future), but if you’ve got a crystal ball or some insider information, get an ARM and laugh all the way to the bank!

Evergreen Mortgage offers not only the most competitive Fixed-Rate mortgage in the state, but also the lowest ARMs, so call us today and get a side by side comparison!

Evergreen Mortgage 2016 Year In Review

2016 is just about done. It's been a hectic year, and I think many are looking forward to the year ahead. A lot happened in this last year, and it is our hope that we were of some help to many of our readers out there. Here is a list of blog posts that were written along with a brief description of what is inside, for your browsing perusal. 

Thanks! and have a great New Year!

1/7/2016 Some Facts About ARMS - Don't understand how 5/1, 7/1 or 10/1 ARMS work? This is a great read for those who might be moving in the next couple of years.

1/16/2016  Credit Card Consolidation Myths - We explain how and why Consolidating Credit Card Debt is usually the best choice when available. 

2/22/2016 Should I Choose A Home Before Talking To A Mortgage Broker? - Short answer, probably not. We'll explain in this post how talking with a broker can give you a better idea of what you can afford.

2/29/2016 Renting Is Cheaper Than Owning A Home - It really is, and we'll explain some of the reasons why here. (Among the most important of which is, you are investing money.)

4/11/2016 Recent Home Valuations: Utah VS Everyone Else - Ever wonder how Utah fares when compared to the rest of the nation when it comes to home value? 

5/16/2016 A Few Tips To Add Value To Your Home - Planning on selling your home soon? Or possibly building an addition? Remodeling? This is a good, quick read for those who are planning on selling their home someday. (protip: Pools aren't necessarily a great investment)

6/17/2016 How To Leverage Your Children - A good read for mom and pops who have kids going to college. They need a place to live, and you benefit from getting Rentals at a lower Interest Rate. 

6/29/2016 Rentals: An Excellent Investment, If You Know What To Expect - Some great advice on how to manage and buy rental properties, get the best rates, and ensure that your rentals are taken care of properly. 

7/8/2016 Mortgage Definitions Made Easy - Simple Mortgage Definitions, reference this if you are ever unsure of what a term means. 

8/26/2016 HOA's What To Expect and What to Watch For - We Explain how HOA's don't necessarily have to be the devil incarnate, and how they can actually benefit you, if you know what to look for. 

9/25/2016 Guide to Skipping Payments When Refinancing - A great guide on how to save yourself a bit of money up front when refinancing your mortgage. 

10/19/2016 Retiring A Millionaire - We discuss some solid methods, that when used in conjunction have the best results of netting you over a million dollars upon retiring. 

11/11/2016 VA Loans: Reason Enough for Everyone to Join The Military - VA loans are arguably THE best loans in the biz. Low interest rates, 100% LTV refinancing... read more if you're interested to see why you should join the military. 

12/12/2016 Christmas Budgeting Guide - Read this if you find yourself falling short near the end of the year, or really if you just want some tips on how to budget better. 

And that's all! It's been a blast folks! We'll be back in 2016 with more new content, so stay tuned, and if you haven't already, subscribe to our newsletter!

 

Mortgage Definitions Made Easy

Whether you already have a mortgage, or are planning on purchasing a home, there are a lot of industry related terms that get thrown around rather casually. Here’s a handy guide for navigating through some of the lesser known terms.

Amortization

This simply refers to the schedule of how the loan is going to be repaid. For instance, you have both 15 year and 30 year fixed rate conventional loans. In the case of each of these, the amortization schedule would be the monthly payment for a 15 year, and 30 year respectively, including interest rates.

Closing Costs

These are costs associated with closing the loan which can include, but is not limited to: fees for a credit report, loan origination fees, and underwriting fees among others. 

Mortgage Escrow

An escrow is the payment that is collected by the lender each month, along with the regularly scheduled mortgage payment, to pay for real estate taxes and hazard insurance premium. While mortgaged homeowners can choose to make these payments themselves, they often benefit from mortgage rate discounts by simply passing them on through the lender, who then holds the funds for payment to the homeowner’s county assessor and insurance company when the payments are due.

To find your home escrow payments, simply find your latest home real estate tax-bill, add in the annual insurance premium, and divide it by 12 (the number of months in a year) This is your monthly escrow payment.

PITI

This is an acronym which stands for Principal, Interest, Taxes, Insurance and represents the total housing payment made in that month. It is calculated by simply adding all of them together.

PMI (Private Mortgage Insurance)

When the loan to value ratio (LTV) is above 80% lenders will generally require private mortgage insurance (PMI) to guarantee the loan against default. Borrowers pay a monthly premium until the loan to value ratio (LTV) drops below 80%. In the case of FHA loans, the only way to get rid of PMI is to refinance into a conventional loan once the LTV is below 80%. Another popular option for conventional loans, to avoid having to pay the monthly mortgage insurance, is to take on a 2nd mortgage.

Points

Percentage points of the loan amount. As an option to borrowers, lenders can allow the borrower to “buy down” the interest rate by paying portions of the loan up front, saving the borrower money over the long term in the form of lower interest rates.

Title  Insurance

Insurance paid by borrowers that ensure the property is free and clear of any liens against it, so that the property may be used as collateral in the event of a default on payment.

This is just a small list of terms that many individuals will often face when refinancing. For more information on terms like LTV, check out our video.

Slight rise in interest rates

Interest rates have gone up ever so slightly this month, but are still pretty low.

Common misconceptions: Renting is cheaper than owning a home pt. 2

“I can’t buy a home, because I can’t afford the down payment”

Traditionally, to get into a mortgage, a buyer would need to put down 20% of the purchase price at the time of closing. This can be quite daunting (the down payment for $200,000 home would be $40,000) and for most, just isn’t a possibility.  In fact, 20% down payments are now an exception as opposed to the norm, especially for first-time homebuyers.

Here are several low-down payment options:

·         FHA loans – FHA loans only require 3.5% as a down payment.  Their rates are also lower than conventional mortgages and allow for less income/lower credit scores.  Most first-time homebuyers buy homes with FHA loans.

·         Conventional loans – You can still get a conventional loan without 20% down.  In fact, you can now get a conventional loan for as little as 3% down.

In addition, there are several no-down payment options:

·         VA loans – For those who are serving or have served in the military (not just veterans), VA loans are available and don’t require any down payment.  They also offer lower rates, no mortgage insurance, etc.

·         USDA loans – For borrowers willing to live in “rural” areas (in Utah, that’s north of Ogden and south of Spanish Fork), USDA also offers loans which don’t require any down payment. 

·         Grants, Gifts, and Seconds – Most loan types allow for down payments to be gifted from family, friends, and even employers.  There are also programs that allow borrowers to get grants for the down payment or borrow 3.5% as a low interest 2nd mortgage.

At Evergreen, we have significant experience helping clients without access to large down payments.  While owning a home takes budgeting and planning, don’t let the immediate absence of a down-payment deter you.