American Homebuyers are Rejecting New Adjustable Rate Mortgages
Even as the housing market starts to sort of get back to normal, there are clear signs that we’re not back to business as usual. Last week, the Mortgage Bankers Association shared their weekly round-up for mortgage news and while people are trying very hard to buy, there’s an elephant in the room: the adjustable rate mortgage.
A huge number of Americans are looking at ARM products like they’re that uninvited member of the party that you really don’t want to hurt, but also don’t want to hang out with. No one wants to say it out loud, but many wonder if the time of the ARM is drawing to a close.
As of the writing of this article, the ARM’s share of mortgage activity is 6.2%. To give a more concrete point of reference here, on average ARMs made up about 20% of the mortgage activity from 1998 to 2008, before the bubble burst.
How Do Interest Rates Compare?
The average contract rate for a 5/1 ARM last week was 4.06 percent, a noticeably lower rate than offered by other programs--though maybe not by enough--including the ever-popular 30-year fixed rate conforming mortgage that came in at 4.84 percent.
Why would anyone reject this sort of interest rate? And how much could they be saving over a 30-year fixed-rate conventional?
Now, this is only based on principle and interest payments, nothing else is being considered. This is just the bare bones. But, if you absolutely knew you were going to sell your home before your ARM flexed at the end of the fifth year, you would absolutely be amiss to not consider an ARM as an alternative to the traditional 30-year fixed rate mortgage.
On the other hand, if you weren’t actually sure what your plans are, but you know that you’d like to put down roots somewhere, the almost $8,000 that you’d save with the ARM option could easily be eaten up by refinancing your mortgage, depending on what kind of program you chose to replace the adjustable rate mortgage. Frankly, the interest rate you’d end up with in five years could also make paying your refinanced mortgage much more difficult since it is very likely to be higher than it is today.
This is just one reason talking about ARMs is tricky. You have to sort of just know what you’re doing in five years. Heck, I don’t know what I’m doing in five days half the time. A lot of things can happen in five years. Thankfully, there are limits on how much your mortgage company can change your rate, so pay close attention. Some don’t change a whole lot, while others will reach for the stars when it comes to your end-point interest rate.
Why are Buyers Rejecting the 5/1 Adjustable Rate Mortgage?
That’s the question, isn’t it? I’ve been reviewing some economic indicators for this column and my “non-economist, just a former Realtor(™)” opinion is complicated. Consumer confidence is down a bit, but retail sales are up, along with spending. Personal savings are also up, though, and consumer credit utilization is down.
Between those figures and what I’ve been seeing locally, my guess is that this tight real estate market has first- and second-time home buyers squeezed and scared. Existing homes are hard to come by right now because there’s just so much competition that leaves new buyers in the dust. Generally, a first timer has little cash, needs to use a program like FHA that can be a real pain for the seller and is unsure when to pull the trigger, so their timing can be less than perfect.
That’s not the profile of an ideal buyer. But most buyers aren’t ideal. Unless you happen to have far more buyers than houses, then you can pick and choose. An ideal buyer has a lot of cash or is paying for the house with cash. They know what they want, they know no house is perfect and they’re going to jump on the first one that meets their personal criteria and they’ll do it all in two weeks.
Wrapping Up: To ARM or Not to ARM?
When faced with the kind of competition that’s in the current real estate market, I’d make the same choice today’s buyers are making. This won’t be your only house, almost certainly, but you may be there more than five years due to the overall economic climate. And at the five year point, the whole story will change. You’d need to have a plan in place to deal with that ARM.
Rather than fighting with another bank, dealing with another closing, letting another insurance guy into your house and all of that, you can just keep rolling with the 30-year fixed-rate mortgage. For me, personally, at the place I am in my life, I’m ready to just buy a house and stay put until I’m old and blind from staring at computer screens my entire career. I’m a 30-year fixed-rate gal right here.
But that doesn’t mean that my neighbor, the 5/1 ARM fella, is wrong. It just means we both found different programs that make sense for our situations. To ARM or not to ARM, that really is the question.