April 10, 2017
Yes, rates have crept up from where they were a year ago, and although most of Orion’s broker’s clients are seeking 30-year fixed-rate mortgages, our AEs are often asked about adjustable rate mortgages.
The primary reason why people consider ARMs is because they often have a lower interest rate than fixed rate loans. The risk is that the rate on an ARM could go up in the future, after the initial fixed period. For instance, a broker will tell a client, “If you think that you may sell the house or refinance within a 3 or 4-year timeline, you might want to consider a 5-year ARM to buy yourself a few extra years in case plans change. Let’s discuss the small difference in rate.”
Orion’s AEs and our brokers know that most ARMs have an initial note rate that is fixed for a period, usually 3, 5 or 7 years. After the initial fixed period, the mortgage interest rate would change based on adding the “then” current index to the margin. Clients are told that the Index can change but the margin cannot, and that it's important to pay attention to the "caps" on a loan because these caps indicate how much a mortgage rate can change after the initial fixed period.
The main risk with an ARM is that the mortgage rate and monthly payment could go up after the initial fixed period. Brokers will explain the various indices that could be used on an ARM so that their clients know what could cause an interest rate to go up or down in the future.
By comparison, the main risk with a fixed rate loan is that a borrower is losing cash flow NOW in exchange for the chance of saving money at some point down the road if they keep the loan for more than 3, 5 or 7 years.
Adjustable rate mortgages are nothing to be afraid of, and Orion has helped many borrowers obtain an ARM loan with our brokers. Be sure to ask your AE and the programs and rates.