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Rates Back to 2009 Levels; Time for ARMs!

Woman walking up steep house-lined San Francisco streetMy headline of course does not refer to militancy but instead to “Adjustable Rate Mortgages,” also known as ARMs.

This Inman article from yesterday stated that mortgage rates have climbed to their highest level since 2009!

Per Inman, 30-year fixed-rate mortgages climbed to an average of 5.37% – up from 5.2% a week earlier.

The article also mentioned that rates have climbed 1.5% over the last three months.

One way to combat the rise in rates is to take an ARM instead of a 30-year fixed-rate loan, as 5 and 7-year ARMs are as much as 1/2% lower in rate than 30-year fixed-rate loans. As a reminder, 5 and 7-year ARMs are fixed for 5 and 7 years respectively, before rolling over to adjustable rate mortgages that adjust every 6 months.

When Rates Fall, Borrowers With ARMs Can Refinance

We normally recommend ARMs for borrowers with short time horizons, a lot of liquidity, or tight debt ratios and payment sensitivity, as set out below. But, we like ARMs more than ever right now because we think it is so likely that rates will drop significantly sometime in the next 6 to 18 months. And – when rates fall, borrowers can simply refinance into a fixed-rate loan.

And below are the more traditional reasons to take an ARM.

Short Time Horizon

If borrowers intend to sell or pay off their loan in five or seven years, an ARM with a 5 or 7-year fixed period is obviously the best option.

Liquid Enough To Pay Down The Loan

If borrowers have ample liquid assets, an ARM is a great option because they can take advantage of the savings the ARM offers and then either: (1) refinance at the end of the fixed period if rates remain low; or (2) pay off or pay down the loan if rates climb.

Lower Payment (Interest-Only)

Sometimes borrowers need to take an ARM simply because the payment is more affordable – especially now because rates have risen so much. The resurfacing of even lower payment “interest-only” ARMs is making ARMs even more enticing.

Low Adjustment & Life Caps

Many ARMs nowadays have much lower life and adjustment caps than ARMs of the past. “Caps” refer to the amount an ARM can adjust in a single year, and over the life of a loan.

If, for example, an ARM with a five-year fixed period has a very low start rate and annual adjustment caps of only 2% and a life-cap of 5% (over the “start rate”), the risk from that ARM is less than what many people might think.

This is particularly the case when borrowers account for the significant savings from taking an ARM with a start rate that might be 1% lower than a fixed-rate loan.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167