September 16, 2019
The majority of Orion’s broker’s clients chose loans with a fixed rate rather than loans with interest rates that adjust. But we feel it is important to point out that ARM loans can play a valuable role in home ownership, and in fact borrowers with rates that adjust have seen their mortgage payments actually decline over the years as rates have come down.
The reasons for borrowers to close adjustable rate mortgages may be dwindling, as recessionary fears have caused longer-term interest rates to drop to near or below short-term rates during the last several weeks. In fact, as of this writing we find the benchmark 10-year Treasury Note yield near 1.50% - a rate unheard of six months ago. But rates can move quickly, as we saw with the Saudi Arabian attacks over the weekend.
The historical advantage that typically comes with adjustable rate mortgages Orion offers is now largely neutralized, as the spread between 5-year ARMs and 30-year fixed rate mortgages is at its lowest level in some time. Per the Mortgage Bankers Association, the average introductory interest rate on a five-year ARM is 3.35 percent, while the average on a traditional 30-year fixed mortgage is now 3.9 percent.
In the past our brokers say their borrowers wanting ARMs generally gravitated to its low initial interest rate, but now, with low rates on longer-term fixed rate mortgages, there is more incentive to take the certainty of a fixed rate mortgage rather than the uncertainty that comes when a rate resets after the initial adjustment period on an ARM. For illustration purposes, say your client plans to finance $100,000 and they could get a fixed-rate mortgage with 4 percent, or an ARM with 3.5 percent guaranteed for the first five years. After five years with the fixed-rate loan, they’d pay about $22,380 in interest. With the ARM, they’d pay $19,488 — a savings of $2,892.
But the 4 percent fixed mortgage likely came with no extra lender costs at closing, but the ARM did, as it usually does. If those costs were more than that $2,892, Orion’s AEs can help you show your clients that they wouldn’t come out ahead at the five-year mark. And afterwards, the ARM is likely to adjust its rate up, erasing the monthly savings over a fixed rate loan and rendering any future benefits over a fixed rate mortgage moot.
Sometimes your clients will have an opinion about the direction of interest rates. “They’re coming down,” they tell you, “So I want an ARM.” No one, however, has a crystal ball about the direction of interest rates. Currently the economy in the United States is strong, but other countries have seen theirs weaken, especially in Europe. And despite our strong economy, which typically leads to higher rates, we are in a trade war with China, and no one can predict exactly what will happen with that, or when. So we advise our clients to examine the various products offered by Orion, and work with one of our AEs to find one with the best fit for your client!