Deaf Mortgage
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ARM vs Fixed Mortgage
Several people have asked me about the difference of ARM and Fixed Mortgage.
ARM = Adjustable Rate Mortgage and limit amount of term of mortgage is fixed then will reset to current market of interest rate.
Fixed Mortgage means your interest rate will stay the same from first day to last day of mortgage payment. (not included property tax or home hazard insurance as they increase annually).
For an example, if your banker or broker showed you a mortgage of 3 years Arm. It means first 3 years will remain at the interest rate it provided at the day of closing. Then after 3 years completed, it will adjust accord to market. 3 years arm does not mean mortgage is 3 years term. Its 30 years mortgage but first 3 years remain the same then last 27 years of adjusting to the market rate. Same rules apply with 1 year ARM, 2, 3, 5, and 7. No 10 years ARM unless its interest only (another topic to discuss later).
Why people get ARM instead of Fixed mortgage?
- This is a good question, it depends on case by case. If the borrower has below FISCO 620 (credit score), and not qualified for 30 years Fixed (traditional loan). Then we will debate to focus on clean up credit history by using ARM for 3-5 years then refinance into 30 years Fixed. Often ARM has lower interest rate than 30 years Fixed to help out budget of individual cases.
Or... individual are looking to stay at the house for 2-3 years then relocate to different state, then we will issue ARM to save budget but hold the property for 2-3 years then sell to relocate to another state. This happens often with big corporation do this, or investors want to create good cash flow.
How this issue can effect the market today?
Subprime and conventional loans are two different type of borrowers. Subprime are people who has low credit score and not qualify for conventional loan. Yet they want to buy a home soon. Brokers and Bankers give loans in ARM under Subprime to help them to get their goal completed. Yet it does not solve the problem if need to refinance and convert into conventional loans. Market today has declined and caused the loan to be greater than house value. If the loan is greater than house value, you are required to pay the difference when refinance for good rates. People who had ARMS want to refinance in 3-5 years (popular during 2003-2005), they need to refinance now in 2008-2010 but their loan are greater than their house value and cannot pay the difference.
Example, purchase in 2003 with 5 years ARM mortgage @4.5%- Sale price: $200,000. No down payment means loan is $200,000 and called 100% financing.
Then...
In year 2008, their 5 years ARM term is almost completed and will increase to 7% interest rate. No problem if house value continue to increase. BUT the house decreased and now the value of house is $170,000 and you owe $183,000balance. You will need to pay $13,000 plus closing cost (about $3,000-4,000) So total out of pocket to refinance soars to $16,000-17,000. Most people do not have $17,000 in bank to pay the difference. So they watch their ARM reset to 7% and increase several hundred dollars and cannot keep up paying the ARM's adjusting rates.
That right its a Ouch
:-o: ... that what is happening right now with the market.
Any question... feel free to ask. (if your question are more personal, please feel free to PM, its should allow you to PM me. I want to protect your identity and confidential information at all cost).
This thread is for educational purpose. Will be part of mortgage blog. Keep eye for new educational mortgage blog.
Several people have asked me about the difference of ARM and Fixed Mortgage.
ARM = Adjustable Rate Mortgage and limit amount of term of mortgage is fixed then will reset to current market of interest rate.
Fixed Mortgage means your interest rate will stay the same from first day to last day of mortgage payment. (not included property tax or home hazard insurance as they increase annually).
For an example, if your banker or broker showed you a mortgage of 3 years Arm. It means first 3 years will remain at the interest rate it provided at the day of closing. Then after 3 years completed, it will adjust accord to market. 3 years arm does not mean mortgage is 3 years term. Its 30 years mortgage but first 3 years remain the same then last 27 years of adjusting to the market rate. Same rules apply with 1 year ARM, 2, 3, 5, and 7. No 10 years ARM unless its interest only (another topic to discuss later).
Why people get ARM instead of Fixed mortgage?
- This is a good question, it depends on case by case. If the borrower has below FISCO 620 (credit score), and not qualified for 30 years Fixed (traditional loan). Then we will debate to focus on clean up credit history by using ARM for 3-5 years then refinance into 30 years Fixed. Often ARM has lower interest rate than 30 years Fixed to help out budget of individual cases.
Or... individual are looking to stay at the house for 2-3 years then relocate to different state, then we will issue ARM to save budget but hold the property for 2-3 years then sell to relocate to another state. This happens often with big corporation do this, or investors want to create good cash flow.
How this issue can effect the market today?
Subprime and conventional loans are two different type of borrowers. Subprime are people who has low credit score and not qualify for conventional loan. Yet they want to buy a home soon. Brokers and Bankers give loans in ARM under Subprime to help them to get their goal completed. Yet it does not solve the problem if need to refinance and convert into conventional loans. Market today has declined and caused the loan to be greater than house value. If the loan is greater than house value, you are required to pay the difference when refinance for good rates. People who had ARMS want to refinance in 3-5 years (popular during 2003-2005), they need to refinance now in 2008-2010 but their loan are greater than their house value and cannot pay the difference.
Example, purchase in 2003 with 5 years ARM mortgage @4.5%- Sale price: $200,000. No down payment means loan is $200,000 and called 100% financing.
Then...
In year 2008, their 5 years ARM term is almost completed and will increase to 7% interest rate. No problem if house value continue to increase. BUT the house decreased and now the value of house is $170,000 and you owe $183,000balance. You will need to pay $13,000 plus closing cost (about $3,000-4,000) So total out of pocket to refinance soars to $16,000-17,000. Most people do not have $17,000 in bank to pay the difference. So they watch their ARM reset to 7% and increase several hundred dollars and cannot keep up paying the ARM's adjusting rates.
That right its a Ouch
:-o: ... that what is happening right now with the market. Any question... feel free to ask. (if your question are more personal, please feel free to PM, its should allow you to PM me. I want to protect your identity and confidential information at all cost).
This thread is for educational purpose. Will be part of mortgage blog. Keep eye for new educational mortgage blog.
