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Can You Save Money With An Adjustable Rate Mortgage? - YouTube
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Are adjustable rate
mortgages bad? Are they risky?
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Are they going to cause
you financial ruin?
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I'm going to talk about that
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today as interest rates
have been rising.
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The adjustable rate mortgage,
ARM, has gained in popularity.
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I just saw a stat
where it might make up 9% of th
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mortgages being originated right
now. So stay tuned.
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I'm going to give you the good,
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the bad, the ugly, the pros,
the cons from my point of view
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when it comes to
adjustable rate mortgages.
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All right, Matt the Mortgage Guy
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here, mortgage broker
and the bringer of truth to you
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I'm going to bring you
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what I see, hear,
and feel from consumers, from
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other mortgage professionals,
from the real estate market,
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whether you like it or not.
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I'm going to bring you up
to date factual information
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straight here from
the lab at the Matt
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the Mortgage Guy headquarters.
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So anyhow, adjustable rate
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mortgage is something that's
come up more often in 2022
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as interest rates
have climbed up in 2020 and 21
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when the 30 year
fixed was sub 3%.
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There just wasn't any value
in an adjustable rate mortgage.
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There wasn't enough benefit,
you know, between a 2.75.
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And if you can get an arm
for two and a half, right?
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A quarter point difference
in rate wasn't enough
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for somebody to take
on the added risk
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of an adjustable rate mortgage.
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And first and foremost,
let me explain to folks
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who don't know what
an adjustable rate mortgage is.
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An adjustable rate
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mortgage is a mortgage
that's going to adjust
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either every six months or
every year after a fixed period
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And that's something
that folks don't understand.
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If you hear five year arm,
seven year arm, ten year arm,
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that five, seven and ten year
is how long it's fixed.
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So it doesn't adjust from
the day it's written, right.
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It's got a fixed period
where you might have a 3.875
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for the first five years,
the first seven years,
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the first ten years.
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After that, it's
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going to adjust based on
whatever index it's tied to.
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It might be prime plus three
or whatever index it is.
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That doesn't necessarily matter.
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What matters is you'll see
something like a ten, six arm.
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Ten years it's fixed.
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Then every six months
it's going to adjust.
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And then you can read the fine
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print on what index
it's tied to and what not.
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What you want to do is
you want to have a game plan
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and know that you're able
to get out of that.
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What some people got into during
the financial crisis, probably
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why arms have such a bad
name is they had a loan
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that adjusted after
only two or three years and
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they had no game
plan for getting out right?
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If lending guidelines
were getting stricter
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and they couldn't refinance
and the rate was adjusting up.
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Bad combination, right?
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What I'm advising people today,
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whether they get a five year,
a seven year or a ten year.
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Put a little thought into your
financial picture five,
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seven and ten years from now.
Are you self-employed?
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Are you W-2? Do you plan
to be employed and showing
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income in those years?
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Because you're going to
most likely want to
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and have to qualify
to refinance out of that
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to get into a fixed rate product
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that's a little bit
more stable. Right.
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Because what happens is
you get a great rate at 3.875,
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but after five years, it might
adjust up a half a percent,
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half a percent, half percent
on these six month increments.
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That thing could get up to
you know, they usually have
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a ceiling built in, right
where it can't go above
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the starting rate plus 5%, but
still going from 3.875 to 8.875
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If you're borrowing $1,000,000,
it's a lot of money. Right.
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So if you want to talk pros
and cons, the biggest con
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and I think most
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people would agree with this
is that it is adjustable
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and so your payment can move,
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your payment can
get more expensive.
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The pro is that plenty
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of products out there that are
seven and ten year fixed.
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And let me be honest with you,
I talk to people all the time.
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I know how long people
stay in mortgages
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because we do refinances.
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We help people who are
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selling and then buying
forward and moving.
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The vast, vast majority of
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people aren't staying
in the same home for ten years,
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let alone the same mortgage.
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So if you're buying something
and A you either know
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you're going to be selling,
moving, refinancing.
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Something's going to change
in under ten years.
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The ten year arm
might make sense. Right.
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Another huge pro
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and I'll pull this up
on the screen because I was
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literally doing this
for a client today.
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$2.1 million purchase, 20% down.
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We've got two loan options,
a 30 year fixed.
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And a ten six arm, meaning
it's fixed for ten years.
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The interest rate
difference is a full percent
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between 475 and 375.
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We can get him an arm
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for 3.75%. It's going to be
fixed for ten years.
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When you're borrowing $1.68
million, the payment
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difference is $1,000
a month. Almost exactly.
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It looks like it's $9 short.
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$991 difference in payment.
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So going to take the extra risk
and know that in ten years
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this thing can and will adjust
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if you haven't refinanced
out of it sooner.
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But for that first ten years.
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$991 a month in savings.
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That's no small amount.
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And of course, if you
borrow half that, it's
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going to be less.
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If you borrow a fourth of that,
it's going to be less.
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But that's where as a consumer,
you've got to weigh
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the pros and the cons of
an adjustable rate mortgage.
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An arm. Right. If
I'm saving $1,000 a month,
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is it worthwhile?
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In this case, I think so.
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I think this is a
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financially savvy person
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who understands exactly
what they're getting into
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and they're not going
to get in trouble.
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This isn't 2006.
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You're signing, you know, an arm
that's going to adjust
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after two years.
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You got three year prepay
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and all that other madness
that went along with that. So
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I think that it's something
that while scary
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for some to say, oh my gosh,
if arms are now making up
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9% of the market,
what are people doing?
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Is it all going to crash?
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Somebody recently
reached out to me too.
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And I totally get this
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because they said, Hey, Matt,
isn't this kind of a crazy time
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to get an adjustable rate
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mortgage as the Fed is raising
the Fed funds rate?
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All of these indexes that
are tied to adjustable rate
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mortgages are going to be going
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up, undoubtedly. True, they are.
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But truth be told, the seven
year arm and the ten year arm
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are set to adjust
in 2029 and 2032.
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Who knows where rates will be
then likely higher.
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But I think the best plans
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for people that are getting
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into these loans,
they will not be in this loan
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for five years after.
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If you do a break even analysis
and you show if somebody took
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the higher interest rate of a
30 year fixed versus the arm
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and even if they stayed into it
three, four, five years
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after the arm period
and adjusted fully to the max,
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they would have paid
less collectively on the arm.
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Now, the counter argument to
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that is like, okay,
but the payment shock
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and if they're in worse
financial position, then
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and it adjusts up and you're
at risk of losing your house.
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These are all real risks.
I don't take those lightly.
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I want people to make sure
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that they understand
exactly what it is.
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Right, because what you
don't want to do
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is get into a mortgage
that's going to adjust
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with no exit plan.
I can't tell you.
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Nobody can tell you
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what mortgage guidelines
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will look like in five,
seven and ten years.
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I can't tell you what
your personal income statement
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is going to look like,
what your credit score
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is going to look like,
any of that stuff.
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Just know that that is
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something that needs
to be taken into consideration.
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What is the exit plan?
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And so that's what I'm doing
with a bunch of my clients
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when we're talking
about adjustable rate
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mortgages is we're talking about
what is the exit plan, right?
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So hopefully this was helpful.
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If you have any questions
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at all, please feel
free to reach out.
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These adjustable rate mortgages
have some really fantastic
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rates, so it's something that
a lot of folks should consider.
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On the jumbo side of things
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is where I'm seeing
the most of these written.
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The spread isn't as drastic on
conventional loans, so it maybe
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if you're buying a starter home
for $400,000 with 20% down.
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This isn't something
that would benefit you,
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but especially for jumbo loans.
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I'm seeing a huge spread.
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And when you're borrowing
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$1,000,000 plus and you're
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talking about a 1% difference
in interest rate,
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that's a lot of money, it's
something to at least consider.
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Any questions at all?
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Please feel free to reach out.
Greatmortgagebroker.com.
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Give me and my team a call.
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We're more than happy to help.
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Good advice. All day. Every day.
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That's all we do. Again,
greatmortgagebroker.com.
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And thanks for watching.
Until next time we gone see.
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