What is a 5/1 ARM?

If you’re like some people, when you hear the mortgage term 5/1 ARM you might say something like, “Ahhhh! Numbers and an acronym—nooooo!!”

Okay, maybe that’s a bit dramatic, but I think it’s fair to say that a 5/1 ARM doesn’t appear to be the friendliest of terms. And that’s really too bad because he’s actually a nice, straightforward guy.

So what is it?

 

Adjustable-rate mortgages (ARMs) are just that—mortgages with interest rates that adjust depending on market movement. Meaning that if rates go up, your monthly payment will increase, and if they go down, your monthly payment will decrease.

The corresponding numbers tell you how often the rate will change. With a 5/1 ARM, the 5 means that the rate will stay fixed for the first 5 years, and the 1 tells you that it’s subject to change every 1 year after the initial 5.

The good

 

One of the best things about 5/1 ARMs is that they usually have significantly lower interest rates than fixed-rate mortgages. For example, our current rate for a 5/1 ARM is 2.375%, while our 30-year fixed rate is at 3.750%. Not only does the lower rate save you money on your monthly payment, but it also gives you the opportunity to take out a larger loan.

* Rates accurate as of 9/23/15. See below for assumptions.

Of course, they do have the potential to adjust to higher levels, whereas fixed-rates stay at the same level for the life of the loan. However, there are ways to take advantage of the low rate without the risk of a rate hike, such as:

• You plan to move within 5 years, therefore the potential rate increase wouldn’t apply to you
• You think your income will have risen to a level where a rate increase would be insignificant
• You want a lower initial monthly payment than is typically offered by fixed-rate mortgages
• You plan on refinancing out of the ARM before the rate gets adjusted to a higher level (can be a risky option because you can never be certain what rates will be like when you want to refinance)
• You have a crystal ball and it says interest rates will go down in the future

The bad

It’s not always possible to work the system like the above scenarios. And sometimes the rate environment trumps even the cleverest of schemes. So when you’re evaluating your own situation, it’s almost certainly a bad idea to get a 5/1 ARM if:

• Rates are rising
• You do not expect your income to grow substantially

 

What you should find out

• Is there a rate cap?

 Some loans have a rate cap built into them, which puts a limit on how high the lender can adjust the rate to. It’s good to have because nobody wants to see their rate being adjusted upward for eternity. Although it is a possibility that the cap is set at a level that would still be crippling for most borrowers.

• Is the loan assumable?

If you sell your home, can the buyer take over your existing mortgage at the current rate? Depending on what rates are up to, having an assumable loan can be a good selling point to have.

• Is there a prepayment fee?

Sometimes, you want to pay off your loan early. If there is a prepayment fee, you’ll get charged for paying off your loan before the original agreement.

 

Bottom line

You’ve got to look at your situation, and ask yourself where you’ll be in 5 years. If you plan on moving or winning the lottery, a 5/1 ARM could be a good call.

 source: totalmortgage.com

6 Ways to Fight Rising Interest Rates

Mortgage interest rates have been hovering between 3.5 and 4 percent for the past 18 months, refusing to rise as quickly as many forecasters had predicted. That means many have been able to lock down favorable rates without the threat of a drastic increase hanging over their heads.

However, later this year, the Federal Reserve is expected to raise its benchmark rate, which has held near zero since December 2008. This can happen as soon as its next policy meeting in mid-September or, more likely, in December.

The long awaited increase is a good sign for the economy as a whole; it’s continuing to expand at a moderate pace, driving solid job gains and declining unemployment. For real estate markets, though, the news isn’t so great.


Likely, the rate hike will be enough to drive rates on 30-year fixed mortgages to well over 4 percent and perhaps closer to 5. With this hike looming, now is a good time for buyers and refinancers to consider their options. These include:

1. Adjustable Rate Mortgages (ARMs). ARMs are a great way to keep rising rates from busting your budget, at least for the first five years of the loan, when you pay little or no interest. When it resets, you can take sell or take your chances on a refi if you have enough equity. ARMs are a good idea if you don’t plan to own the house a long time.

2. Fix up Your FICO. When they get loan terms from their lender, many buyers wonder what happed to the super low teaser rates their lender promised in its advertisements. Those “bait” rates are real, but they’re just not available to everyone—just those with fantastic FICOs and moderate-sized loans.

Lower FICO scores translate into higher risk for lenders and their investors, so they raise rates to compensate for the risk. By working hard to improve your credit score—reviewing your history, paying bills on time, avoiding taking too much credit, keeping credit card balances down—you can raise your FICO and lower the interest rate on your mortgage.

3. Increase Your Down Payment. By increasing your down payment, you fight rising rates two ways. First, you reduce the amount you will have to borrow and, in turn, the amount of interest you will have to pay. With a smaller loan you may also get a lower interest rate; smaller loans reduce lenders’ risk and a lower rate can result.

4. Lock Your Best Rate. Rates change every day and they vary slightly by location. You can improve your chances of getting the best possible rate during the time that passes between your loan approval and closing by asking your lender for the right lock your rate, usually within a 30 day period. Follow mortgage rates as closely as you can and time your lock to coincide with a low point.

5. Buy a Cheaper House. If the house costs less, your loan is going to be smaller. With a less expensive house, you may also be able to put more down, reducing your principal even more. With a smaller loan, you should also realize a lower rate.

6. Shop for Rates. Lenders compete aggressively by the rates they offer. Like any business, some will offer more favorable rates than others to bring in more business. Also, lenders with access to capital at lower cost can afford to charge lower rates. Shop around for the best rates by sharing your FICO score with the lender so that they don’t quote you a “bait” rate you will never see.

source: totalmortgage.com

Volume of $1 Million to $10 Million Mortgages Hits All-Time High

It’s no secret that mortgage lending has hit the skids in recent months. There are considerably fewer borrowers refinancing their existing mortgages and home purchases are still pretty sluggish.

Earlier this year, Black Knight Financial Services said mortgage origination volume fell to its lowest point on record for a February, with records dating back to the year 2000.

But one area of the market is on fire. I’m talking about the $1 million to $10 million loan amount niche, also known as super jumbo. Pretty much any loan officer’s dream.

Despite there not being a secondary market for such loans, banks are more than happy to hand them out to their wealthiest clients and keep them on their books.


After all, they’re low risk borrowers who also happen to have a lot of money. And wealth management seems to be all the rage these days.


15,000 Mega Mortgages Were Originated During Q2

Banks reportedly made more than 15,000 mortgages with loan amounts between $1 million and $10 million during the second quarter in the nation’s top 100 metros, the highest total ever according to CoreLogic.

Additionally, sales of homes valued at $2 million and up increased to the highest level since at least 2006 during the first half of the year.

Surprisingly, this is happening at a time when all-cash home sales are also at record levels, which at first glance seems a little strange.

Back in May, RealtyTrac said cash was used for a record 42.7% of residential home sales in the first quarter of the year, which was up from 37.8% a quarter earlier and 19.1% a year prior.

The rich generally pay all cash as opposed to taking out a mortgage, but the crisis has produced a lot of fire sales thanks to the sheer number of underwater borrowers and foreclosed properties out there, which could explain the high all-cash share.

The Rich Have No Mortgage Limits

Still, the rich always have plenty of options, and with mortgage rates as cheap as they are, and banks desperate to get their hands on their assets, we’re seeing a lot more of these mega loans these days.

Per Bloomberg, the rich are happy to take out low-rate adjustable-rate mortgages instead of being forced to sell their stocks, which also happen to be at all-time highs.

And because they get mortgage discounts for having so much money, the deals are pretty hard to pass up. This explains why guys like Mark Zuckerberg and Buffett opt to take out loans instead of simply paying with cash.

Some of the banks issuing the largest number of mega mortgages say they don’t even have maximum loan limits for such clients. For example, Union Bank and Bank of the West will apparently consider any loan request.

Union Bank said it has originated more than 350 mortgages with loan amounts of $2 million or more this year. And loan requests at BNY Mellon for similar loan amounts have increased 30% this year compared to 2013.

Sadly, this comes at a time when first-time home buyers are struggling to take out relatively miniscule mortgages. Of course, the wealthy have no problem putting down 30% or more, which greatly increases their options and chances of approval.

source: thetruthaboutmortgage.com

You Can Have an Adjustable-Rate Mortgage, But Only If You Educate Yourself First

Homeowners opt for ARMs instead of fixed mortgages for a number of reasons, but it’s mostly to save money.

After all, adjustable-rate mortgages are offered at a discount compared to fixed mortgages, and the level of discount varies based on how long the ARM is fixed.

The shorter the fixed-rate period on an ARM, the lower the interest rate. So if you want the lowest rate, you need to go with a one-year ARM as opposed to a 7/1 ARM.

Back in the mid-2000s, it wasn’t uncommon to see 1-month and six-month ARMs, which adjusted after just a month and six months, respectively.

Clearly this made for a lot of uncertainty, especially for less sophisticated homeowners who were often aggressively pitched such mortgages.

To make matters worse, lenders offered better pricing, or rather commissions, on ARMs with prepayment penalties.

Long story short, a ton of naïve homeowners wound up with short-term ARMs and three-year prepayment penalties, meaning they couldn’t refinance (or even sell in some cases) once interest rates went up.

As home prices tanked and monthly mortgage payments went up, the housing market imploded. The irony is that many of those who took out ARMs before the most recent housing crisis (to save money) lost their homes because of them.

Could We Repeat History Again?

 

But times have changed, right? Perhaps. The prepayment penalty is largely a thing of the past, and ARMs are a lot less popular these days thanks to ultra-low fixed rates.

However, the ARM-share of mortgages has been inching up lately, mainly because home prices are on the rise and borrowers see value in getting a discount for the first several years of their loan.

There also seems to be this belief that rates aren’t going to rise anytime soon, so why not go with an ARM and save lots of money?

Unfortunately, it’s that line of thinking that could land a lot of these borrowers in a tough spot a few years down the road, even if they qualify at the fully indexed rate today.

First off, payments can become unmanageable after a reset, especially if the borrower’s financial situation changes for the worse. And let’s face it; nobody’s job/income is set in stone.

Secondly, if rates do rise and you seek a refinance, you need to qualify. It’s never a guarantee to qualify for a mortgage. It’s also not cheap to refinance.

To alleviate some of these concerns, two financial literacy advocates have come up with a few ways to make ARMs safer.

Introducing the Safer ARM

 

John Bryant, the founder of Operation HOPE, and Robert Gnaizda, a founder of Greenlining Institute, have proposed a few ways we could make mortgages safer without impeding access to credit.

Their first suggestion is to require non-profit financial education before a low- or moderate-income family can take out any type of ARM, or interest-only mortgage for that matter.

Secondly, they believe no ARM should have a term that is less than the median time Americans own their primary residences, which is roughly seven to nine years.

In other words, you would only be allowed to take out a 7/1 or 10/1 ARM, and if you were considered a low- or moderate-income borrower, you’d have to complete a homeowner education class as well.

The pair also believes no institution should be able to offer interest-only mortgages to borrowers with less than a $5 million net worth.  Don’ worry Mark Zuckerberg, you’re okay.

They argue that had these measures been in place a decade ago, the crisis would have never happened.

Reforming the QM Loan

 

Aside from taking issue with ARMs and IO options, Bryant and Gnaizda think the Qualified Mortgage rule could benefit from some tweaks as well.

They believe Fannie Mae and Freddie Mac should consider any 30-year fixed mortgage with a minimum seven percent down payment as a QM loan.

But only if the borrower’s income doesn’t exceed the median and the home is valued at no more than 90% of the region’s median price.

These loans wouldn’t require mortgage insurance either, though lenders would be able to charge a premium of 50 basis points for the first five years of the loan to compensate for risk (and even longer if the borrower fell delinquent).

Again, these borrowers would have to complete both pre- and post-financing education, though they could also receive a temporary waiver for up to six months of housing payments if unemployed or sick after five years or more of homeownership.

They plan to discuss these ideas with financial institutions, though similar warnings/suggestions thrown around a decade ago seemed to fall on deaf ears.

source: thetruthaboutmortgage.com

Second Mortgages

When you hear the term “second mortgage,” a negative connotation may come to mind. You may be thinking, “Why would I need a second mortgage?” I’m not in financial distress.

Well, times have changed, and gone are the days when homeowners put down large down payments and pay off their mortgages in a matter of years. Nowadays, it’s quite common to hold a second mortgage, typically in the form of a home equity line as part of a combo loan.

Types of Second Mortgages

Many homeowners carry both a first and second mortgage, often closed concurrently during the home purchase transaction. In these cases, the second mortgage is referred to as a “piggyback loan” because it sits behind the first mortgage. Piggyback loans are used to extend financing terms, allowing borrowers to put down less on a home, or break up their loan into two separate amounts to produce a more favorable blended rate.

[See the latest mortgage rates from dozens of lenders, updated daily.]

 

Two common formulas for a piggyback loan would be an 80/10/10 or an 80/20. An 80/10/10 translates to 80% on the first mortgage, 10% on the second mortgage, and a 10% down payment. An 80/20 is an 80% first mortgage, a 20% second mortgage, and zero down payment.  Uh oh.

Second mortgages can also be opened after a first mortgage transaction is closed, as a source for additional funds. Homeowners can either elect to take a lump sum of cash in the form of a home equity loan, or opt for a home equity line of credit (HELOC), which allows them to draw specific amounts of money when needed using an associated credit card. Keep in mind that you need equity in your home to execute this type of transaction.

Second Mortgage Payments

Monthly payments on second mortgages are typically pretty low relative to the first mortgage, but only because the loan amount is generally much lower.  Rates on second mortgages can be quite steep, so be sure to do the math to ensure it’s the right choice.

Second mortgages are offered in both adjustable and fixed-rate options, with home equity loans typically fixed and home equity lines of credit variable.  Home equity lines of credit also come with an interest-only option during the draw period, as do some home equity loans early on.  In any case, you should have several options to choose from to find the right fit for your particular situation.

Advantages of Second Mortgages

Second mortgages that are closed concurrently with the first mortgage during a purchase transaction are also referred to as “purchase money second mortgages”. As mentioned earlier, these second mortgages allow homeowners to come in with a smaller down payment, or no down payment at all. During a purchase transaction, the homeowner can break up the total loan amount into two separate loans called a combo loan. The risk is split between the two loans, allowing higher combined loan-to-values and lower blended interest rates.

Second mortgages in the form of piggyback loans also allow homeowners to avoid paying PMI, or private mortgage insurance. The savings can be quite substantial depending on how the loan breaks down, often saving the homeowner hundreds of dollars a month. If the first loan is kept at or below 80% loan-to-value, PMI needn’t be paid.

Additionally, breaking up your total loan amount between a first and second mortgage may allow you to keep your first mortgage under the conforming loan limit, which should help you obtain a lower interest rate if you’re in jumbo loan territory.

Second mortgages can also be opened after the purchase transaction is complete, as a home equity loan or home equity line of credit. This additional allowance of funds can provide a homeowner with much needed cash to improve the quality of their home or pay off high-interest loans, while avoiding a refinance of the existing first mortgage.

Disadvantages of Second Mortgages

Once you’ve got a second mortgage, it will be increasingly difficult to get any additional financing, such as a third mortgage. While it’s probably not common that a homeowner should require a third mortgage, emergencies do happen, and you may mind yourself trapped if you need more funds for any other reason.

Interest rates on second mortgages are typically quite high compared to first mortgages, and it’s quite common to receive an interest rate in the double-digits on a second mortgage. You could get a better deal with just one mortgage, or possibly even by paying mortgage insurance.

Many second mortgages are home equity lines of credit, which are tied to the prime rate. Whenever the prime rate is adjusted, the interest rate on your home equity line will change accordingly, effectively making it an adjustable-rate mortgage. When the Fed was raising the prime rate month after month in years past, many homeowners faced substantially higher monthly payments on their second mortgages.

Some home equity lines come with additional fees, such as an early closure fee, as well as minimum draw amounts that may exceed your personal needs. Make sure you read all the fine print to avoid any surprises.

Last but not least, second mortgages mean more debt, more interest due, and can potentially extend the amount of time it takes to pay off your first mortgage.

All that said, there are a number of pros and cons to opening a second mortgage, but they shouldn’t be looked upon as negative financing instruments, rather just another option to consider when seeking home loan financing.

One final note: Many mortgage lenders are reducing the availability of second mortgage programs as the secondary market continues to grapple with credit issues, so you may find it much more difficult to obtain a second mortgage these days.

source: thetruthaboutmortgage.com

Average U.S. Rate on 30-year Loan Rises to 4.53%

WASHINGTON -- Average U.S. rates for fixed mortgages edged higher this week for the third straight week but remained low by historical standards.

Mortgage buyer Freddie Mac said Thursday hat the average for the 30-year loan rose to 4.53 percent from 4.48 percent last week. The average for the 15-year loan increased to 3.55 percent from 3.52 percent.


Mortgage rates peaked in August at 4.6 percent amid expectations the Federal Reserve would reduce its $85 billion a month in bond purchases. The purchases push mortgage and other long-term rates lower. Last month the Fed deemed the economy strong enough for it to reduce the monthly purchases by $10 billion.

Mortgage rates are sharply higher than they were a year ago when the 30-year fixed rate was 3.35 percent and the 15-year was 2.65 percent. That's contributed to a decline in home sales over the past three months.

Still, the average for the 30-year loan has been below 5 percent for nearly three years, a trend that has made home-buying more affordable.

Separately, the Commerce Department reported Thursday that U.S. construction spending rose in November at the strongest pace in more than four years, driven by solid gains in home construction and commercial projects.

To calculate average mortgage rates, Freddie Mac surveys lenders across the country Monday through Wednesday each week. The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.

* The average fee for a 30-year mortgage rose to 0.8 point from 0.7 point. The fee for a 15-year loan remained at 0.7 point.

* The average rate on a one-year adjustable-rate mortgage was unchanged at 2.56 percent. The fee stayed at 0.5 point.

* The average rate on a five-year adjustable mortgage increased to 3.05 percent from 3 percent. The fee was unchanged at 0.4 point.

source:  dailyfinance.com