Posted on: 14th Dec, 2007 11:59 pm
hi all,
i find a lot of people going the wrong way when it comes to choosing a mortgage. perhaps it's their lack of knowledge and understanding that prevents them from taking the right loan offer or making the right financial decision. dealing with right lender also matters a lot.
primarily, choosing a fixed rate or an adjustable rate loan is something most borrowers fail to decide and they end up taking the wrong step. depending upon your situation, a 30 year frm could be good enough for you compared to a 5/1 year arm. but how do you decide?
to help you choose the right loan, rick pelleriti, our community member and an upfront mortgage planner, has come up with a comparison on 30 year frms and 5 year arms – basically it's about whether you will choose a 5 year arm time and again or go for a 30 year frm instead.
the best thing about the white paper is that, it shows through simple calculations how much you need to pay on a 30 year frm and what if you go for 5 year arm instead and then refinance the latter time and again.
i hope you'll be able to take better decisions when you glance through the white paper.
thanks,
sam
i find a lot of people going the wrong way when it comes to choosing a mortgage. perhaps it's their lack of knowledge and understanding that prevents them from taking the right loan offer or making the right financial decision. dealing with right lender also matters a lot.
primarily, choosing a fixed rate or an adjustable rate loan is something most borrowers fail to decide and they end up taking the wrong step. depending upon your situation, a 30 year frm could be good enough for you compared to a 5/1 year arm. but how do you decide?
to help you choose the right loan, rick pelleriti, our community member and an upfront mortgage planner, has come up with a comparison on 30 year frms and 5 year arms – basically it's about whether you will choose a 5 year arm time and again or go for a 30 year frm instead.
the best thing about the white paper is that, it shows through simple calculations how much you need to pay on a 30 year frm and what if you go for 5 year arm instead and then refinance the latter time and again.
i hope you'll be able to take better decisions when you glance through the white paper.
thanks,
sam
but what makes the libor index drop whereas all other indices are on the rise?
i'm simply reporting information i read in the trade, including forecasts. without a crystal ball, i make the best suggestions i can to people needing advice on when and whether to refinance or purchase there own properties or their investment properties.
in order to define the movement of the treasury and libor indices, you need to study the manner in which they are constructed and their histories.
in order to define the movement of the treasury and libor indices, you need to study the manner in which they are constructed and their histories.
i am a mortgage broker like many of you and unless US bank is the one doing your loan then the 30yr fixed rate is much better than the 5/1 or 3/1 for that matter unless your doing a jumbo loan which then its really lender by lender.
It is so easy to make the numbers say what you want them to say. There are a lot of holes in the white paper. It is good general information, but that is what it is general.
I do almost exclusively FHA loans, so almost all are fixed. But I don't necessarily agree with his logic and it is really flawed actually.
Currently in this market right now...some lenders have a par rate on a 3 yr FHA ARM at 5.25%, 30 year is 6.125%. The margin is 2%, the index is the 1 yr treasury...which currently is 2.25%. Fully indexed RIGHT now it is 4.25%..which means if the treasury does not go up over 1% in the next three years the first adjustment for this borrower will be DOWN.
Also FHA ARMS are 1-1-5, meaning first adjustment can't be more than 1%, each annual adjustmetn can't be more than 1% and the lifetime can't be more than 5%.
This is different than Conventional ARM's...those are generally 2-2-5 or 2-2-6.
This part of this loan program is HUGE, because of the narrow change year over year the rate trends to average right around the start rate. I have done the calcs using a random number generator using the high and the low of the treasury over the last 10 years. The average over 30 years spits out to right around 5%.
The white paper assumes all worst case scenarios..what about when you have a 7% 30 year fixed and marker rates drop...you need to refinance to get the better rate...if you are in an ARM, your rate will adjust down without the cost of refinance.
This is a very complicated subject, that needs to be figured out on a case by case basis with each borrower, not just blanketing everyone into the same loan.
I do almost exclusively FHA loans, so almost all are fixed. But I don't necessarily agree with his logic and it is really flawed actually.
Currently in this market right now...some lenders have a par rate on a 3 yr FHA ARM at 5.25%, 30 year is 6.125%. The margin is 2%, the index is the 1 yr treasury...which currently is 2.25%. Fully indexed RIGHT now it is 4.25%..which means if the treasury does not go up over 1% in the next three years the first adjustment for this borrower will be DOWN.
Also FHA ARMS are 1-1-5, meaning first adjustment can't be more than 1%, each annual adjustmetn can't be more than 1% and the lifetime can't be more than 5%.
This is different than Conventional ARM's...those are generally 2-2-5 or 2-2-6.
This part of this loan program is HUGE, because of the narrow change year over year the rate trends to average right around the start rate. I have done the calcs using a random number generator using the high and the low of the treasury over the last 10 years. The average over 30 years spits out to right around 5%.
The white paper assumes all worst case scenarios..what about when you have a 7% 30 year fixed and marker rates drop...you need to refinance to get the better rate...if you are in an ARM, your rate will adjust down without the cost of refinance.
This is a very complicated subject, that needs to be figured out on a case by case basis with each borrower, not just blanketing everyone into the same loan.
So many things can factor into choosing between a fixed rate versus an adjustable. Each consumer needs to consider what is in their best interest. Industry exports can argue both sides of that coin and win. If you are working with a good lender, they will be able to explain all of your options so you can make a decision that is right for you.
i didn't read the entire white paper word for word, however, i think something the author missed was the fact that when you refi into a five year ARM, you are reamortizing your loan, so that the paymet is lower on the 30 year fixed... so, of course you will have paid more off in a 30 year fixed... YOU'RE PAYING MORE MONEY EACH MONTH. in order to compare apples to apples, you need to re-run the amortization schedule with the difference between the refi'ed monthly payment and the original monthly payment as additional principal applied to the montly payment on the new loan. the break-even is simple to calculate. if the rate drop saves you more than $3,000 in interest paid over a 5 year period, then it makes sense to refi.
"so that the payment is lower THAN the 30 year fixed", i meant.. not "on the 30 year fixed"
I have to agree with Mr. Chuck and with Badger,
not everyone has the same mortgage needs. Granted that most people who have not so great credit would benefit froma FRM (fha) however if you live in a place that is transient (Vegas) or that has military bases (San Antonio) it is common to have ARM loans.
There are different types of loans for different types of needs, if you are a military person and will be stationed somewhere for 3-5 years why would you want a 30 year mortgage if you know that more than likely you will be moving within those 3-5 years...
of course the customer has to be aware of what they are getting into and that is where the responsibility and ethics of each individual Loan Consultant comes in. Some consultants don't want to bother to educate the borrower (that's why we are in this mess of an economy) too many loans were made with the bottom line in mind NOT the best interest of the client and of course big banking saw a way to increase their bottom line as well ... well now we all have pie in the face... :(
Consumer - take the time to educate yourself you are buying a HOME not a pack of gum.
Lender - take the time to educate your client and you may just find a customer for life.
not everyone has the same mortgage needs. Granted that most people who have not so great credit would benefit froma FRM (fha) however if you live in a place that is transient (Vegas) or that has military bases (San Antonio) it is common to have ARM loans.
There are different types of loans for different types of needs, if you are a military person and will be stationed somewhere for 3-5 years why would you want a 30 year mortgage if you know that more than likely you will be moving within those 3-5 years...
of course the customer has to be aware of what they are getting into and that is where the responsibility and ethics of each individual Loan Consultant comes in. Some consultants don't want to bother to educate the borrower (that's why we are in this mess of an economy) too many loans were made with the bottom line in mind NOT the best interest of the client and of course big banking saw a way to increase their bottom line as well ... well now we all have pie in the face... :(
Consumer - take the time to educate yourself you are buying a HOME not a pack of gum.
Lender - take the time to educate your client and you may just find a customer for life.
Hello all,
I want to introduce myself. My name is Dhiyu. I am 24 years old and living in Indonesia. I am a newbie in house refinancing world. So I want to learn from all of you. Thank you very much.
To your article, I think most people have a little right information about mortgage and house refinancing. There are a lot of "grey information" from the lender and they often make a decision from a grey data of grey information. So i think we need to consider some factors for mortgages.
I think we must consider how long we are actually going to be in our home.
The Mortgage Bankers Association claims that the month to month
savings may not add up if you are only planning on staying in your
home for a year or two. Consider the future closely before going
through with a dramatic financial.
[Link deleted as per forum rules. Thanks.]
I want to introduce myself. My name is Dhiyu. I am 24 years old and living in Indonesia. I am a newbie in house refinancing world. So I want to learn from all of you. Thank you very much.
To your article, I think most people have a little right information about mortgage and house refinancing. There are a lot of "grey information" from the lender and they often make a decision from a grey data of grey information. So i think we need to consider some factors for mortgages.
I think we must consider how long we are actually going to be in our home.
The Mortgage Bankers Association claims that the month to month
savings may not add up if you are only planning on staying in your
home for a year or two. Consider the future closely before going
through with a dramatic financial.
[Link deleted as per forum rules. Thanks.]
In reading through the various posts on this topic, it is interesting how the spreads between the 30yr FRM and the 5/1 ARM have essentially disappeared since the thread was started. In many instances, the ARM product actually now has a higher rate than the 30yr FRM and its only advantages are related to loan limits and a few other factors.
It is amazing how things have changed so fast.
It is amazing how things have changed so fast.
i am in agreement, eric. there's no way i would suggest an arm to somebody at this time (at least with my peculiar mix of clients). fixed rates are equivalent or even better in virtually every case.
We have an interest only 5/1 ARM at 4.125% due to readjust on 8/15 at the 1 year LIBOR + 2.75%. Current forcasts on the 1 year LIBOR show it decreasing and our payment could actually go lower if it goes under 1.35.
While I understand the problem with ARMs, I cannot see refinancing to a higher rate with substantial costs -- 11k to 22k. I always pay a bit more each month and we don't anticipate being in the house forever. The rates for 30 year fixed are greater than 5% with 2.25 points. We have a 2nd we're considering rolling in making the total loan between 330 and 500k.
I'm not an expert, but it doesn't seem like a good idea for us.
Opinions?
While I understand the problem with ARMs, I cannot see refinancing to a higher rate with substantial costs -- 11k to 22k. I always pay a bit more each month and we don't anticipate being in the house forever. The rates for 30 year fixed are greater than 5% with 2.25 points. We have a 2nd we're considering rolling in making the total loan between 330 and 500k.
I'm not an expert, but it doesn't seem like a good idea for us.
Opinions?
i have to agree with you mary.
I am sitting here wondering how your closing costs would be $11k-$22k
I'm in a similar situation to Mary. I have a 5/1 ARM at 5.375% that will readjust in March 2010. It will readjust to 1 year LIBOR + 2.25. And if I'm reading the loan docs correctly, it will adjust and then that rate will hold for the next 12 months before it adjusts again. I'm watching the forecasts closely and hoping my payments might actually come down too.