A 47 year old borrower came to us recently with a $1.4 million mortgage and 5 years left on an Adjustable Rate Mortgage (ARM) at 2.875%. He plans to be in the house for the rest of his life and wanted to convert his loan to a 30 year fixed.
We told him not to do it. And, this is why: the borrower earns $400,000 per year, has over $1 million in savings, and will continue to save. He also has a very low rate now. If rates go up in five years, he can just pay down his loan. If rates hold or go down, he can simply refinance.
Borrowers with ample liquidity should not be afraid of ARMs, as they often provide significant savings with little downside risk.
The other reason borrowers should consider ARMs is “time horizon.” Very few borrowers ever keep their loans longer than seven years b/c of job changes, moves, or refinances (for cash out or lower rates). ARMs are often a more affordable and safe option for borrowers with shorter time horizons.
With rates climbing, lenders will likely improve their ARM pricing and product selection in an effort to maintain loan volume. ARMs, however, took on a stigma after the mortgage meltdown of 2008. But those ARMs were mostly 2 year fixed and monthly ARMs, with less than favorable adjustment provisions.
Today’s ARMs are fixed for 5, 7 or 10 years and are often a more prudent option for many borrowers.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167
