Quiz: Why do our San Francisco Bay Area agents have a more positive view of ARMs than our agents in other states?
Answer: Because most of the homes they sell require jumbo or “high balance” financing.
ARMs (or Adjustable-Rate Mortgages) come with either 5, 7, or 10-year fixed periods, before converting to adjustable-rate loans with rates that adjust every six months.
We were not quoting any ARMs for a few years because the “Yield Curve” was inverted – meaning that short-term rates were higher than long-term rates.
But now that the yield curve is returning to normal (“un-inverting”), ARMs are back – BUT ONLY IN THE JUMBO REALM.
NOTE: Jumbo ARM lenders also accept “strong” high-balance borrowers (“strong” means 20%+ down, excellent credit, low debt ratios, adequate reserves after close).
High balance loans, once again, are Fannie Mae and Freddie Mac-backed loans (ranging from $806,500 to $1,209,750) for “high cost” areas, like the San Francisco Bay Area.
Our most popular ARM right now is a jumbo 7/6 ARM, which is usually about 3/8% lower than our 30-year fixed rate.
Are ARMs Better than 2-1 Buydowns for Borrowers Looking for Temporary Payment Relief?
Probably not, as ARMs offer much less rate reduction (3/8% vs. as much as 2% in the first year of the loan for a 2/1 buydown).
ARMs do offer a much longer reduced-rate period, but that is why I used the word “temporary” in my question.
I Thought Rates Were Going to Shoot up Another 1% Because of America’s Deficit Woes?
We’ve been hearing over and over that the era of cheap financing is over and that rates are going to start to climb indefinitely – because the gig is up for America.
Our deficits are too large, we can never pay off our debt, and investors are going to start demanding higher and higher yields as a result.
But then yesterday, we had a very weak jobs report – and rates plummeted (despite our massive deficits and the GOP’s willingness to keep the spending train running at full speed).
George Gammon then, of course, immediately jumped on YouTube – New Jobs Data STUNS The Market (Are We In A Recession Now?) – to remind us that it is always “Growth and Inflation Expectations” that drive bond yields – and NOT the supply of Treasuries (amount of U.S. Debt).
He could be wrong, but yesterday definitely corroborated his viewpoint – as does the fact that we increased our debt from $8 trillion in 2005 to over $36 trillion today, and rates are about the same (a point Gammon makes often).
