Unlike “Fixed Rate Mortgages”, having an interest rate that remains the same for the entire loan term, rates on Adjustable Rate Mortgages (ARM’s) change periodically. You would think in a rising interest rate environment that locking your interest rate would make the most sense – to avoid higher monthly mortgage payments. Then why are ARM’s making a comeback?
To start, ARM’s have lower interest rates than 30-year fixed rate mortgages (so the monthly payment is lower, allowing borrowers to maximize their cash flow). ARM’s therefore offer more payment flexibility (not only can borrowers use the resulting savings towards personal expenses, but they can elect to make additional principal payments on their mortgage).
Plus, people generally do not stay in the same home for more than about 7 years. If you enter into a “7/1” ARM, this means that the interest rate is fixed for 7 years, and then the rate adjusts thereafter based upon prevailing rates at that time. Sound risky?
In the past, ARM’s were much riskier loans. Depending on the lender, ARM’s may have had:
All of these onerous terms changed with the onslaught of regulations after the housing crisis. Today, ARM’s “cap” the amount of rate increase at the time of the required adjustment – and the interest rate is prevented from increasing by more than 5% over the life of the loan.
The majority of today’s home buyers are large, highly liquid, private and publicly traded investment firms. The New York Times, pursuant to statistics provided by CoreLogic and Campbell HousingPulse (as supported by Fitch Ratings and industry leaders), confirms that these predominantly Wall Street investors have been successful in Arizona and California. It’s no secret that their latest target is Florida.
Blackstone Group has bought over 26,000 homes in nine states. Colony Capital is spending $250 million every month and now owns over 10,000 properties. It’s brilliant – swoop into markets where the financial crisis was hit the hardest, quietly stake claims to many homes (or in some cases entire neighborhoods), create an artificial price surge, and then capitalize.
I wonder what will happen to home prices when these companies start to sell en masse…
Lately I have been receiving inquiries from people wanting to move back into adjustable rate mortgages (ARM’s). Home flipping is back for people who are focused on the short term: They are buying quickly, riding the price surge wave, financing their purchases via acquisition ARMs, and then hoping to sell in the near term by following Wall Street’s lead.
Well that all sounds interesting . . . if taking risk by timing the market is what you enjoy (and having to unpredictably uproot to another home at any given time).
P.S. With long-term fixed rates still very low (and still only about 1% above ARM rates), I continue to advise my clients to lock-in for the long term.