refinancing

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.)

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

   

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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.