\
home subscribe advertise reprints e-mail help RSS about us LOG IN

Mortgage News

 

Mortgage News

HOT Topics

production

servicing

compliance

legal

fraud

secondary

jobs

appraisal

site map

www.loan-academy.com/
twitter linkedin
facebook google+
Search:

Mortgage News

News by Subject
Complete list of specialty news sections.

Purchase Subscription
Subscribe to MortgageDaily.com and get immediate access to all news, statistics and archives.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Consumer Mortgage News
Free mortgage news for prospective borrowers.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from MortgageDaily.com.

Mortgage News Reprints
Put entire MortgageDaily.com stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed MortgageDaily.com stories free on your Web site or for your RSS reader.

News Archives
Archive of MortgageDaily.com stories by month going back to 1999.

Press Releases
Reports and announcements from MortgageDaily.com.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Directories
Directories of lenders, branch operators and mortgage service providers.

Mortgage Graphs
Directories of lenders, branch operators and mortgage service providers.

Stories For Salespeople
Loan originator and broker news and stories. Advice about improving mortgage loan originations. Insights to and profiles of mega-producers.
sales stories | sales books | originator newsletter




Industry Commentary


Hybrid Advantages

Some benefits to these ARMs


By DAVE HERSHMAN

May 9, 2003


A recent article in USA Today focused on the fact that the 5/1 hybrid adjustable has gained much popularity in 2003 as the spread between fixed rates and this instrument has widened during the past year. For many years, I have been extolling the benefits of adjustables. Even with today's low fixed rates they're worth considering because the average life of a mortgage in the United States has dropped from over seven years to under five years during the last few decades.

Many homeowners are uncomfortable with a mortgage payment that may change every year. These same consumers realize that they are not likely to use a mortgage for thirty years and therefore are unlikely to benefit from paying the higher rate associated with a fixed rate mortgage. Fortunately, there are alternatives that exist between a short-term adjustables and fixed rates. A 5/1 adjustable is one such alternative.

For many homeowners, knowing that their rate and payment will be stable for at least five years provides enough security to warrant the long term risk of payment changes past the fifth year. The starting rate of a 5/1 adjustable lies somewhere in between a fixed rate mortgage and a one year adjustable:

Example starting rates:

6.5%
30 Year fixed rate mortgage
5.75%
5/1 Adjustable
4.75%
1 Year adjustable
(note that rates are just examples and do not represent actual spreads)

This loan has a fixed rate for five years and afterwards converts to a one-year adjustable. After the adjustment period, the loan is typically limited by an annual adjustment limit, or cap, of two percent. The loan would have an interest rate limit over the life of the loan, which would normally range from four percent to six percent over the initial starting rate.

One major variation within available 5/1 adjustable programs entails the first adjustment after the five-year period. Many of these loan programs allow a full upward adjustment to the life cap during this one adjustment and apply the two percent annual cap to subsequent adjustments. The vast majority of lenders tie the annual adjustments to movements in One-Year Treasury Instruments (the index).

It would not be unusual for a 5/1 adjustable rate mortgage to also be available with an option to convert to a fixed rate. The exercise of this option will typically be restricted to certain time frames during the life of the mortgage (for example, the second through fifth anniversaries). Exercising such a conversion option will normally require a fee and many consumers assume that the rate at conversion would be equal to the current rate of the mortgage after an annual adjustment. In reality, the rate of conversion would be tied to instruments which track fixed rate mortgages, as opposed to the adjustable rate indices that control annual adjustments.

To decide whether a 5/1 adjustable is the best option, there are a few questions that should be answered:

How long do you expect to own the home (or more precisely - have this mortgage?)
If you expect to sell or refinance in less than ten years, it would be wise to consider alternatives to fixed rates.< You could leave the home and keep the mortgage (use as a rental property) or stay in the home and refinance the mortgage. This is why your length of stay is not the only relevant information.> Most mortgages are retired in five years or less.

What do you expect the direction of interest rates to be in the next two to seven years?
If rates are expected stay low during this period, there may be opportunities for refinancing before the mortgage converts to a one-year adjustable.

Do you expect significant increases in your income in the future?
If so, it may make sense to enjoy lower payments now at the risk of higher payments further down the road.

Before opting for this instrument, it's a good idea to perform an economic analysis of the future performance of this loan as compared to other alternatives. Especially, consider the worst case scenario over a certain period of time. The table below shows such an example.

Worst Case Scenario Comparison

5/1
ARM
Fixed
Rate

Year 1 4.75% 5.50%
Year 2 4.75% 5.50%
Year 3 4.75% 5.50%
Year 4 4.75% 5.50%
Year 5 4.75% 5.50%
Year 6 6.75% 5.50%
Year 7 8.75% 5.50%
7-Year Average: 5.61% 5.50%

Such a simplistic analysis does not take into consideration such factors as the future cost of money. It does provide an uncomplicated view of the performance of an adjustable over a certain time period. In the example, the 5/1 adjustable's performance will be roughly equal to that of the fixed rate over a seven-year period. If the consumer's use of the mortgage is expected to be seven years or less, the prognosis for the 5/1 is excellent!

  • Editor's note: According to Fannie Mae, in 2002 5/1 ARMs accounted for the largest share of ARM originations, including about half of all hybrid orginations.

Dave Hershman is the leading author and a top speaker for the mortgage industry with seven books-including two best sellers for the Mortgage Bankers Association of America. Dave also heads www.OriginationPro.com Mortgage School. Email: [email protected]

SUBSCRIBERS: Edit Subscription | Subscription Help | or call 214.521.1300

Subscribe Contact Us Site Map

Copyright © 2017 Mortgage Daily, D a l l a s
Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

p r i c i n g engine directory

wholesale lender directory

More Mortgage News Resources (full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter

MBS

mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

real estate news

refinance news

reverse mortgage news

secondary marketing

social media

servicing news

subprime news

wholesale lenders