Adjustable Loans Are Scary! Not! Fixed or Adjustable? You Decide
by Olan Carder
Have you ever overreacted? I mean really thrown the baby out with the bath water?? I have many times. My business partner Gary and I laugh sometimes about some of the ridiculous ideas we have come up with in the past to solve horrifying problems that didn’t even exist.
The mortgage industry has been turned upside down over the past year, and there has been plenty of overreacting! The news media has been like a pit bull locked onto a juicy new bone. Negative stories are the norm, and they have thrown several babies out with the proverbial bath water. One of these babies is the Adjustable Rate Mortgage product. These loans have been demonized as a slick gimmick used by unscrupulous lenders to trick people into high priced homes they could not afford. NOT TRUE! (That is not Gary on the right.:))
Although ARM (adjustable rate mortgage) loans can be misused, they are absolutely NOT evil loans. ARM loans were created as a temporary alternative to help make home ownership more affordable in a high interest rate environment, but gained popularity again when people began to realize the truth about home ownership patterns. The truth is that the VAST MAJORITY of homeowners do not keep their first home for 30 years!!!
Today ARM loans save homeowners thousands of dollars when used properly.
Many people only plan on being in a particular home for a short period of time…
EXAMPLE: For a mortgage of $200,000, if you took a 5/1 ARM vs a 30 Year Fixed, assuming rates of 5% and 6% respectively, you would save over $6,000 in a 3 year period if you used your monthly savings to pay down the principal. That means when you sold the home after year 3, you would walk away with over $6,000 MORE CASH without spending an extra dime on monthly payments vs the fixed rate option. If you planned on being in this house for only 3 years and your loan officer didn’t mention this option to you, he could have potentially cost you over $6,000!
If you planned on keeping the house over 5 years then this option might be totally inappropriate for you, but the problem would not be the loan itself… the problem would be the bad advice from your loan officer. There are ARM loans that are fixed for periods of 6 months, 1 year, 3 years, 5 years , 7 years, etc… There are caps on these loans that can protect you in case you go past the initial fixed period. The most important aspect of selecting the right loan is to get ALL the information about what options you have. A trustworthy loan officer will take the time to explore and understand your situation before suggesting a certain loan… if you talk to a loan officer that pushes one loan over another without knowing the details of your situation… RUN!! Remember, prescription before diagnosis is malpractice!!!
Olan Carder, Myers Park Mortgage
Thanks Olan. I’ve always used a 5/1 or 7/1 ARM. Interested in homes in Charlotte? Try this Search For Charlotte Homes Page or give me a call direct at 704-351-1519. An interesting post South Charlotte Homes For Sale and Appreciation Report.