mortgages

Is An Adjustable Rate Mortgage (ARM) Right For You?

Are you seeking a mortgage and wondering whether an Adjustable Rate Mortage (ARM) might be right for you? The following article from Apartment Therapy outlines three cases wherein an ARM might just make sense, and save you money. If you are seeking a mortgage, that likely means you are working with a local realtor. Any good realtor, such as our group at Maple and Main Realty in Northampton, MA, will be able to direct you to local banks and/or mortgage brokers. A lender or mortgage broker will be able to speak to about which products are best for you, given your particular situation - both financial and otherwise. Read on to see if, perhaps, an ARM might be right for you. However, please be sure to speak with an expert who knows your local market before making any decisions to do so!

3 Times Experts Say Adjustable-Rate Mortgages Make Financial Sense

by BRITTANY ANAS

An overwhelming majority of homebuyers opt for fixed-rate mortgages. The terms of these loans offer all the warm and fuzzy feelings that come with a long-term, stable relationship. Go with a 30-year fixed rate and your mortgage payment next month will be the same as it will be in 2049, which makes budgeting super-duper predictable.

Already popular with many first-time homebuyers, fixed-rate mortgages solidified themselves as the darling of the mortgage industry following the housing crisis. Most people thought adjustable-rate mortgages (ARMs) were just a bad idea. Borrowers turned away from ARMs, fearing that once the rates reset, it could be difficult to keep up with housing payments, and thus put them at risk of foreclosures.

But adjustable-rate mortgages seem to be making a comeback. While they still are risky for a long-term investment, they have more safeguards in place than they did prior to the housing market crash, like how much and how fast a mortgage rate can adjust.

Here’s what the numbers tell us: In May 2019, adjustable-rate mortgages only made up 6.7 percent of new home loans, according to Ellie Mae, a software company that processes more than a third of the mortgages in the United States. But in December 2018, ARMs seemed to be mounting a comeback, making up 9.2 percent of new mortgages—the highest since Ellie Mae began tracking the data in 2011.

The biggest misconception about ARMs? That they should never, ever be used. In fact, there are circumstances when finance and mortgage experts say adjustable-rate mortgages actually make more sense a fixed-rate. 

“People should not be afraid of an adjustable-rate loan,” says Melissa Cohn, executive vice president at Family First Funding LLC, based in New York City, who favors seven-year ARMs and has one on her own home. “Historically adjustable rates have always been lower than a 30-year fixed rate and can be a great money saver.”

Recognizing that homebuyers have unique financial situations, we asked mortgage lenders when it makes sense to go with an adjustable-rate mortgage. Here, three situations in which they’d recommend an ARM. 

But just a reminder before we delve into the scenarios : It’s a good idea to talk all this over with a home lending advisor, says Shelby McDaniels, channel director for corporate home lending with Chase Home Lending.

“Everyone’s situation is different and there is not a one-size-fits-all loan,” McDaniels says.

1. You’ll move soon 

First, an explainer on how ARMs work: The title of the loan lets you know when the interest rate can reset. So, if you get a 5/1 ARM, that 5/1 means the loan’s lower introductory rate will last for five years, and, after that, it’s subject to adjusting on an annual basis, Holden Lewis, NerdWallet‘s home expert explains. 

It’s best to get an adjustable-rate mortgage when you feel confident that you will sell the home during the introductory period, or within a year or two of the end of the introductory period, Lewis says. 

“So if you get a 5/1 ARM, the safest course is to do so if you expect to sell the home within seven years or so.” 

If you’re buying your forever home, you could be subject to ever-increasing interest rates after the introductory period ends—unless you refinance, Lewis says.

Piggybacking on this, if you are buying a starter home and will want to upgrade within five years, an ARM may be a good fit. 

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Many people don’t consider their actual circumstances and take a fixed rate without giving thought to an ARM, Cohn says. “If you are a first-time homebuyer, newly married, growing a family—those are all reasons in my eyes to take an ARM as your housing needs will change as you go through life.”

Another great reason? You’re starting your career in an expensive city where rent is consistently going up, but you don’t plan on living there in your next chapter of life. In fact, the mortgage are more popular in high cost metro areas like San Jose, California.

“An interest-only option can make ARMs even more attractive for those who are in higher cost-of-living cities on a temporary basis,” says Lauren Anastasio, Certified Financial Planner at SoFi, a personal finance company. “An interest-only ARM typically results in the lowest possible monthly payment during the fixed-rate period and can be a great way for someone to lock-in their monthly housing cost in a location where rental costs tend to increase each year.”

2. Interest rates are low

Adjustable-rate mortgages are a great option in a low or declining interest rate environment, explains Riley Adams, a CPA and senior financial analyst who runs the personal finance blog Young and the Invested. Typically, ARMs anchor to some publicly-available interest rate benchmark (such as LIBOR, Fed Funds rate, prime rate, etc.) and add a defined number of basis points to the overall rate offered to you under the ARM. If your ARM adjusts way higher than what you were paying, you can refinance to another ARM or a fixed-rate mortgage—whichever option saves you the most money. (Though sometimes refinancing can be out of the question if housing prices drop greatly—one of the problems that happened during the 2008 housing crisis) 

“Because we have been in a low-rate environment for an extended period of time and this looks likely to continue, going after this lower interest rate would make economic sense due to the interest cost savings,” Adams says. 

On his previous mortgage, which he took out in July 2011, he went with a 30-year fixed rate and regrets the decision. 

“Had I opted for the 5/1 ARM, I would have paid considerably less in interest and ended up with a lower rate were I to refinance,” he says.

3. You plan on paying off your mortgage quickly

An ARM could be a good fit if you plan on paying off the mortgage before the rate adjusts, says Kristopher Barros, marketing strategist at Embrace Home Loans in Middleton, Rhode Island. 

“That is a less common scenario for a typical homeowner, but still a good reason to take advantage of the lower rates typically associated with an ARM,” Barros says.

A final note: If you are considering an ARM, be sure to comb over the terms of the fixed period. Most common are 3, 5, 7, and 10 year fixed-period ARMs, says Andy Harris, president of Vantage Mortgage Group, Inc. and member of the Association of Independent Mortgage Experts (AIME). Three-year ARMs are less common and more risky with the unknowns, making the longer-term initial fixed-rate period more attractive, he explains. But, the longer the fixed period, the higher the interest rate generally. 

Decisions, decisions! (But, again, before deciding, talk to a home lending advisor about your situation, as McDaniels recommends.)

Thinking About Buying vs. Renting?

The decision to buy a home is not one that is taken lightly by most. It is among the largest purchases (if not THE largest) one will make in their lifetime. Not everyone is in a position to buy vs rent. For this reason, as realtors in the Northampton area, we always suggest that a potential buyer start the process by speaking with their local bank or a mortgage broker to determine whether they can afford to buy and, if so, what purchase price is within their range.

To me, real estate has always made sense as a place to invest money. It seems less fickle than the stock market, and you have the added benefit of being able to live in and enjoy your home, while (hopefully) building equity. While the following piece from the Daily Hampshire Gazette uses the San Diego real estate market to make it's point about the benefits of home ownership - it is still a salient one. If you are in position to be able to buy a home vs. rent, it is an investment worth making. It's always a good idea to work with a knowledgeable buyer agent when purchasing a home. In this way, you are more likely to negotiate a fair price, and choose a home that has solid resale value. Read on for more about buying vs. renting.

Buy vs. rent: Can you afford to wait?

Buying a home is probably the biggest financial decision most of us will make. Dreamtime


By San Diego Tribune Staff
Thursday, November 09, 2017

Buying a home is probably the biggest financial decision most of us will make. While many variables factor into that decision, one key element is whether it makes more financial sense to buy a home rather than renting one.

According to industry experts, it depends on how long you plan on staying in a home.

“Given certain parameters, I can tell you that if you intend to be in a home for three to five years, it is almost always better to buy,” noted Matt Brady, a loan officer at Skyline Home Loans.

That’s because even though there is sizeable upfront expenditure when buying a home, you’ll be seeing the benefits after a few years.

Principal reduction is the amount paid on the cost of the home itself and not the interest. The idea is that by the time you plan on selling the home, you’ll have paid some of the cost of the house and will get more for it than you paid for, resulting in spending less over time than you would have renting a similar place.

Although home prices are high in San Diego — the median price is $535,000 for a home, $400,000 for a condo and $623,750 for new construction — area rent is also high and increasing. The median rent for a one-bedroom is currently $1,560; for a two-bedroom, it’s $2,020, according to the latest figures released by Apartment List, a national rental marketplace. That’s a 4.6 percent increase over last year.

Brady calculates the financial benefits of owning a home this way:

According to the National Association of Realtors, most people own a home for approximately nine years before selling. If a renter initially pays $2,200 for a two-bedroom home, after nine years, the rent will have increased to $3,000 at a 4 percent increase per year.

While the renter will have paid around $40,000 less in rent over those nine years than a buyer who purchased a $400,000 home, the owner’s home will have appreciated by about $200,000 in those nine years, Brady said. (And while no one can predict the future, most analysts assume that home prices will continue to rise and that San Diego will stay apace with the national average of a 4 percent annual increase).

The homeowner also will have paid down the mortgage by about $73,000 and had the added tax benefits of owning a home, which according to Brady would be about $40,000. In nine years, a buyer is ahead more than $225,000 from someone continuing to rent.

“The bottom line is unless you can rent the $400,000 house for $1,500, it makes much more sense to purchase it,” Brady said.

Buying a home is not for everyone. Renting is often less stressful and more flexible. But if you’re ready to settle into one place for a while, go over the numbers to see what works best for you.

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Potential Pitfalls of Buying a Short Sale

Over the years, I've had a handful of homebuyers ask me about the process of purchasing a short-sale or bank-owned property. In theory, it sounds great! A Northampton area house being sold below market value - what could be better? But, the reality of of purchasing such a property can be rife with potential pitfalls.

I assisted a young couple in the process a couple of years ago. They were interested in a lovely 4 bedroom, 2 bath home with a wrap around porch, garage and private yard in Easthampton, MA - a short sale. The home was empty, we couldn't confirm that the boiler worked, and mold was growing in the basement. Ultimately, my buyers had to back out of the purchase because they needed to sign another year's lease for the apartment they were renting or risk being homeless while the unpredictable closing time frame for the purchase of the short sale unfolded before them. 

I came across this article below from Apartment Therapy  which outlines possible issues that can arise during a short sale purchase.

Thinking About Buying a Short Sale? Read This First

by Tara Mastroeni 9/15/2017

Many buyers, especially first-timers, are enthralled by the prospect of buying a short sale — and it's not hard to see why. Bottom basement sale prices make these transactions seem like a no-brainer. Unfortunately, most of the time, these too-good-to-be-true deals also come with a huge catch.

Before you commit to buying a short sale, read this first. We've outlined a few red flags that you should be aware of prior to taking the plunge. Take the time to consider each of these possibilities and decide if you're prepared to take them on, If so, you can move forward having made an informed decision. If not, then you know that focusing on traditional sales will probably be a better fit for you — one less thing to worry about!

It Could Take a Long Time to Settle

The term "short sale" is misleading. Rather than describing a transaction that can be settled quickly, it actually refers to the fact that a bank has agreed to let the sellers come up "short" on their loan in order to avoid foreclosure. In exchange for this opportunity, the sellers have agreed to give the bank the final say when it comes to accepting an offer. Before the sale can move forward, the offer must go through a lengthy approval process, which can take up to 3 to 6 months, on average.

During the approval process, the bank must first review the sellers' financials — their debts and assets — in comparison to the proposed sale price in order to decide how much of a loss they're willing to take. That documentation must be reviewed by several different departments, which often slows things down significantly. Additionally, if there is more than one loan on the property, each bank will need to make sure that the offer satisfies its needs.

You'll Need to Pay Most of the Transaction Costs

In a normal sale, buyers and sellers have a chance to negotiate who will cover the closing costs, aka the one-time fees associated with the sale that are collected at settlement. (The exact charges will vary, but they can include anything from the cost of inspections to property taxes and title insurance.) Both parties will also negotiate who is responsible for taking care of any necessary repairs on the property.

Since the bank is already taking a loss on the value of the loan in a short sale, it's unlikely that they'll be willing to assume any further costs. Most short sale contracts include a clause where the buyer agrees to take on sole financial responsibility for covering these fees, so if you decide to move forward, be sure that you have enough immediate cash on hand to account for these additional expenses.

You Could Be Held Responsible for the Sellers' Debts

When a debt goes unpaid, a lien or judgment is filed with the court system. Some will follow the individual who's responsible for the debt, while others get attached to a particular property. In a typical sale, a title company or attorney will perform a search to identify these debts and work with the seller to resolve them before settlement.

In a short sale, things may go a bit differently. Depending on the seller's financial situation, these debts may become assumed with the transfer of a deed, meaning that anyone who buys the home will automatically become responsible for their repayment.

Bottom line: Be sure to read all of the paperwork that comes with a short sale carefully before submitting an offer so that you'll be informed of the specifics of that transaction. You should always know exactly what you're agreeing to before signing any legally-binding documents.

Don't Forget to Pay Off Your Previous Mortgage When You Refinance!

I came across this interesting tidbit in the Boston Globe today about refinancing an old mortgage. While this piece does suggest the possibility of impropriety on the behalf of ones' attorney... I prefer to see this as information for the informed consumer; another tool in the took kit; a reminder to cross your t's and dot your i's. 

As realtors, we work closely with Northampton area real estate attorneys towards the end goal of home sales and purchases. We are lucky in that we have a wealth of reputable, experienced and communicative attorneys to recommend to our buyer and seller clients. There is always the possibility of human error in any business transaction. This article just makes a salient point about making sure that your old mortgage is paid off at the time of refinancing. Since the current 30 year fixed rate mortgage at Florence Savings Bank, for instance, is at 3.75% with no points - now may be a good time to think about refinancing!

Ask the Lawyer: Refinancing? Make sure your old mortgage gets closed

   

MG/Fotolia

Hugh J. Fitzpatrick III - Globe Correspondent

August 30, 2017 9:41 am

Although the process of buying, selling, or refinancing a home is somewhat standard, as a real estate lawyer, I’ve had more than a few surprises.

One such case was just brought to my attention. Story: Man owns a property in Massachusetts and has refinanced his loan several times. Unable to tolerate another New England winter, he decides to move South and rent out his house. The house burns to the ground, but no one is hurt, thankfully. While dealing with the insurance company, the owner realizes that his prior mortgages weren’t closed before the new ones were opened.

When you refinance, a lawyer is usually involved in the transactions. If the lawyer is representing the lender, he or she is responsible for paying off the old loan with a part of the proceeds from the new one. The money comes into the lawyer’s trust fund account, then he or she issues a check or wires funds to the old mortgage company to satisfy the outstanding balance on the old loan.

Unfortunately, I’ve heard stories over the years of lawyers misusing client funds, taking in the proceeds from a new loan but not paying off the old. In these Ponzi-like schemes, the lawyer will make the monthly payments so the lender will not start foreclosure proceedings. The homeowners never find out; they just assume the loan has been paid.

How do you prevent this? If you are refinancing a loan with a new company, be sure to do the following:

–  Note the phone number on your monthly mortgage statement;

–  Five days prior to refinancing and getting your new loan, call your old mortgage company/servicer to let it know you will be paying off the balance;

–  Wait at least three days after you are issued your new loan (but no longer than a week), and call your old mortgage company to verify that it has received the payoff. (The lawyer handling the payoff should send the money right after the three-day period has passed.)

–  If a week has passed and the loan has not been closed, call the lawyer’s office and ask for an explanation. Tell the lawyer that you want written verification that the loan has been paid.

–  Keep following up with the old mortgage company to verify that it has received payment.

–  If the lawyer doesn’t do as requested, contact the Massachusetts Board of Bar Overseers (www.massbbo.org).

What happens if a loan isn’t paid off? Homeowners can seek protection if they purchased an owner’s policy of title insurance when they bought the home — with the outstanding mortgage company making a claim against the lender’s insurance policy, which is issued with all mortgages.

Hugh J. Fitzpatrick III is the founding partner of New England Title and Fitzpatrick & Associates PC, a Tewksbury-based law firm specializing in real estate conveyancing. Send your questions and comments to Address@globe.com. Look for our special Fall House Hunt coverage starting Sept. 11.