If you’ve been reading about the real estate and mortgage industry lately, I’m sure you’ve heard about how bad Adjustable Rate Mortgages (ARM’s) are and how people are “stuck” in them.  But once again, this is where generalizations in the media do not give you the whole picture.

Did you know out the trillions of dollars of ARMS set to reset this year a good chunk of those may actually adjust lower?  Some people who are being persuaded to switch into a fixed loan may actually be giving up additional savings for no reason.

I’m not saying ARMS are for everyone, and there are some ARMS that are just plain terrible, but if you look closely and do some careful planing, an ARM can provide great savings.

For the past two years there has really been no demand for ARMS as the bond markets were experiencing an inverted yield-curve (meaning short term rates were actually higher than long term rates) but now with the recent interest rate cuts by the federal reserve the spread has widened and ARMS once again are something to consider.

Let’s look at today’s rates for an example.  A 30 year fixed mortgage closed today at around 6.25%, while a 10/1 ARM (meaning your rate would be fixed for 10 years before it adjusts) sat around 5.375% and a 5/1 ARM was right at 4.875%.  

Since the average family tends to move every 5-7 years, a family not planning on staying in their home for more than 10 years might want to look closely at an ARM.

When considering an ARM you need to look at three IMPORTANT  details:  the index, the margin, and the caps.  This where you’ll discover that all ARMS are not created equal. 

The index is just that…and index used to track rates.  The two most commonly used indexes fro ARMS are the 1-Year CMT Index and the 1-Year LIBOR index.  These indexes are usually easy to find on the internet or in a publication such as The Wall Street Journal. Currently the 1-Year CMT is around 2.75%, compare this to January of 2007 when it sat at over 5.00%.

The “margin” (or spread) is what the lender adds to the index to determine your interest rate.  A common margin for conventional ARMS is around 2.25%.  So if your ARM was based upon the 1-Year CMT (2.75%) with a margin of 2.25%, your FULLY-INDEXED rate would be at 5.00%.  If your ARM is getting ready to reset, pull out your paperwork and look for your index and margin in your note and determine if your rate is going to go up or down.

The last part of the equation in evaluating ARMS is the term CAPS.  There are typically two CAPS to be aware of; the first is the ADJUSTMENT cap, and the second is the LIFETIME cap.  The adjustment cap limits the change to your rate at the time your rate adjusts, and the lifetime cap is the total your rate can adjust over the life of the loan.  Here’s a common way for caps to be presented…2/2/6.  In this example the first number is the increase (or decrease) that your rate could adjust on it’s FIRST adjustment, the second number is the cap on which the rate can adjust on each subsequent adjustment, and the final number is the lifetime adjustment cap for your rate.  If your start rate was 5.00% on a 5/1 ARM with these caps, at the end of five years your rate would be determined by adding the INDEX at that time plus your MARGIN, but capped not to exceed more than 2.00% higher than your start rate, so your rate would not increase on this adjustment to more than 7.00% at that time.

As you can see, there is a lot to look at when considering an ARM, but with careful planning and a little education ARMS can provide big savings over fixed rate mortgages and should not be considered taboo just because of what you might read, see, or hear from the media.  

*This is a re-post of an article I had previously posted, but due to some technical issues in transferring fromTypePad to WordPress I had to delete it and re-post it.

Courtesy of Sue Botelho

Tracking the Track Record

What the ‘Experts’ Say about Housing Prices

“The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline.”

- Time Magazine 1947

“Houses cost too much for the mass market.  Today’s average price is out of reach for two-thirds of all buyers.”

- Science Digest 1948 (average price at the time: $8,000)

“The goal of owning a home seems to be getting beyond the reach of more and more Americans.”

-Business Week 1969 (average price at the time: $28,000)

“The era of easy profits in real estate may be drawing to a close.”

-Money Magazine 1981

“If you are looking to buy, be careful.  Rising home values are not a sure thing anymore.”

-Miami Herald 1985

“Most economists agree…a home will become little more than a roof and a tax deduction, certainly not the lucrative investment it was…”

-Money Magazine 1986

“We’re starting to go back to the time when you bought a home not for its potential money-making abilities, but rather as a nesting spot.”

-Los Angeles Times 1993

Note that 1993 was the absolute low-point for real estate values in Los Angeles.

Prices have sky-rocketed since.

“Financial planners agree that houses will continue to be a poor investment.”

-Kiplinger’s Personal Financial Magazine 1993

“A home is where the bad investment is.”

-San Francisco Examiner 1996                

In the 4th Quarter report issued by Zillow.com Oregon’s real estate market is showing signs of stagnating or even declining for homes purchased in 2007. Of course this information is based mostly on estimates and the ranges for error are significant.

Perhaps the more telling sign for Oregonians is what is happening in California. As can be seen by this image California is the hardest hit real estate market which has cut off the supply of buyers moving north to Oregon which Oregon has benefited from your the past 5-6 years.

Portland State University’s Center for Real Estate just released it’s first quarter report for 2008.

This is a very informative tool for Oregon home buyers, and though the majority of the focus is on the Portland area, there is also a great deal of information on the rest of the state including Bend, Medford and Eugene.

You can download the report here:

http://www.pdx.edu/media/r/e/RE_Quarterly_08_1Q.pdf

The Oregon Deparment of Veteran’s Affairs (ODVA) has a great program for eligible veterans buying a home in Oregon.

The program is different than the Federal VA program, and each have their own benefits. You also can’t get an ODVA loan at as many locations as you must use an approved broker to obtain this program.

The Lending Company became an approved broker in 2007 and is one of two locations in Eugene that currently offer this great program.

Interest rates were dropped on Tuesday February 5th to 4.875% (5.025% APR) or 4.99%(5.141% APR) with two different fee structures.

For more information on this program and to dtermine your eligibility, check out the ODVA’s website at : http://www.oregon.gov/ODVA/Rates_And_Maximum_Loan_Amount.shtml

Ric Edelman, one of America’s top Financial Planners has made available to The Lending Company a special production of his DVD entitled “10 Great Reasons to Carry a Big Long Mortgage.”

If you live in Oregon, just email me your address and I will send you a copy for FREE! This DVD is sold by Ric Edelman on his site for $29.95, and Amazon used to have it for $39.95.