Will an ARM Loan Work For Your Clients?

While it’s the job of the mortgage professional to explain the ins and outs of adjustable rate mortgages (ARMs), it’s also important for real estate agents to understand how ARMs work and for whom.

Buyers are drawn to ARMs because the rates quoted in advertising are lower than fixed-rate mortgages. Most ARMs have a fixed-rate period at the beginning of the term, but after this initial period, the rate adjusts and could go significantly higher.

The terms of the mortgage determine how often the rate adjusts, how high the rate will ever be allowed to go, and how quickly it can increase.

An ARM’s interest rate is made up of the margin and the index. The margin, which is always fixed, is added to the index, which always has the potential to change.

The margin is set by the lender at the time the rate is locked. The index will be based on some economic indicator, such as treasury bills.

Once a year, or once every two years, the index is recalculated, and the interest rate that the buyer is being charged is adjusted.

In times of economic challenges, the indicators tend to be low, keeping the interest rate low. In a robust economy, when the indicators are increasing, so do buyers’ interest rates.

When you’re considering whether an ARM is appropriate for a particular client, be aware that qualifying for an adjustable rate mortgage is now more difficult than in the past.

After the mortgage meltdown, government regulators instituted Dodd-Frank, whereby lenders now require buyers to qualify for the fully indexed rate-a rate the mortgage could reach at some future point.

If, for example, the rate could increase to 11% at any point in time, the buyer must qualify for that mortgage as if the rate were 11% today. Buyers who are thinking short term-when the initial rate still applies and before the indexed portion kicks in-may be good candidates.

ARM lenders offer low rates initially, anticipating that rates will increase over time. If rates do increase, the buyer’s payments will also increase. But note that the buyer has initially had to qualify for his or her mortgage on the assumption that rates could rise to a certain level. So, is all well?

Not necessarily. The buyer may feel stretched making higher payments-maybe his or her situation has changed. So there are several options: Refinancing would be one.

If refinancing isn’t in the cards, he or she could make the higher payments until the home can be sold or the rates decline and the payment returns to a more manageable level.

Sadly, if it gets to the point where the buyer isn’t able to refinance, sell, or make the payment, they will default on the mortgage.

And, even if the borrower is able to refinance at a later date, he or she will undoubtedly be doing it at a rate that is higher than it was at the time they took out the initial mortgage.


Make Your Listings Shine With Sellers’ Home Inspections

With intense competition in many markets, to generate interest in a property your listings need to be on their A game. What better way to put many buyer concerns to rest than to have a home inspection to show them?

For the price of a home inspection, your listing will shine in a sea of other properties on the market for the simple reason that buyers don’t like surprises. The belief on the part of buyers that new homes likely won’t have any significant issues may have some credibility, but it is unlikely that a 10-to-15-year-old property won’t have some items that need to be addressed.

Build on this by getting a home inspection, then having any issues addressed and highlighting the fact that they have been corrected. Even better, provide receipts from reputable contractors showing that the work has been completed.

This will pique buyer interest for two reasons: The first is that only a conscientious homeowner with nothing to hide would be likely to expose their home-warts and all-to potential buyers. Buyers sense this and will respond.

As well, many buyers would sense an opportunity. If there are issues that haven’t been dealt with, they can negotiate price reductions or other concessions with the sellers. And DIY buyers, in particular, are motivated, knowing they can handle the issues they already know about, and that they’re not likely to encounter surprises.

Finally, sellers will have peace of mind knowing buyers are fully aware of what they’re buying.