Kasey J. Marty is an executive vice president at Guaranteed
Rate. He manages business risk and product development
for Guaranteed Rate’s secondary marketing department.
Marty started with the company in 2004 as a loan officer,
moved up to branch manager and then transitioned to his
current role in 2011. As the point person for relationship
building with agencies, aggregators and insurers, he is the
key player in advancing new business opportunities. Reach
Marty at firstname.lastname@example.org.
The One-Two Punch to Rising Rates
Adjustable rate mortgages can win over skeptical borrowers with lower
rates and higher security
By Kasey J. Marty
Like practically every other sector of the U.S. economy, the housing industry can expect significant changes in the face of new eco- nomic pressures this year. Two big topics
defining the country’s financial news bear this out: We
have a new president with a radically different agenda
than his predecessor, and the Federal Reserve raised its
key interest rate this past December and again this past
March. In addition, the Fed has indicated that it plans to
raise rates two more times this year.
These factors inevitably create a sense of doubt
among borrowers, often encouraging a wait-and-see
approach to refinancing or buying a new home. Hesitation and inaction carry their own risks when it comes
to making one of life’s biggest decisions, however,
especially in a changing economic landscape. That’s
why some loan originators are educating borrowers
on adjustable rate mortgages (ARMs). These can be a
beneficial lending option for those who understand
how they work.
You read that right: ARMs may be the antidote to
borrower indecision during economic upheaval.
Educating uneasy borrowers who have concerns about
ARMs can be challenging for loan originators. Many
borrowers will likely want to know how ARMs, seen by
some as a contributor to the 2008 housing crisis, now
represent a sound home-loan option.
The answer is simple: Today’s ARMs are not the
same as the lending instruments that helped spark
the recession. Many of those products had short initial fixed periods and high adjustment caps. Most ARM
products today follow a standard adjustment cap of
5/2/5 with some offering a 2/2/5 cap structure.
The first number is how much the rate can change
initially after the fixed-rate period ends. The second
number is the cap on yearly changes after the initial
change, and the third number is the lifetime cap. So,
the interest rates on these ARMS can never increase
more than 5 percent above the initial rate. Freddie Mac
has reduced the initial payment cap to only 2 percent
on the 5/1 ARM, down from 5 percent, substantially
reducing the potential payment shock when the fixed-rate period of an ARM ends.
In addition, the riskiest of the ARM products are no
longer prevalent, such as negative amortization products, reduced documentation, and loans with pre-payment penalties. Interest-only ARM products are
less common, but are still available to the most financially-savvy borrowers from some of the mortgage
industry’s biggest players.
The benefits of the ARM products today are significant and varied:
■ ■ Customizable terms. Even under unpredictable
market conditions, ARMs provide customers stability during the initial fixed period of the loan, which
typically lasts five, seven or 10 years. For homebuyers who know how long they will stay in their houses,
an ARM could be a beneficial choice but it is always
wise for borrowers to consult with a financial adviser
to assess their short- and long-term financial goals
■ ■ Lower rates. During the initial fixed period, ARMs
typically have lower rates than comparable fixed-rate products, which can be a powerful way to quiet
the sirens of alarmist headlines and soundbites that
stoke consumer worry about rising rates.
■ ■ More security. The option for borrowers to select
lower initial rate-adjustment caps limits the amount
the mortgage interest rate can change after the
fixed period expires, making payment shock less of
■ ■ Increased cash flow. Lower rates translate to
lower monthly payments, freeing up cash for cus-
tomers looking to save, invest or spend a little
more each month. Demonstrating this feature with
fixed-versus-ARM monthly-payment scenarios is an
effective way to show borrowers the practical ben-
efits of ARMs.
Consider the lower monthly payment an ARM offers
during the initial fixed-rate period, for example, and
compare that to a fixed-rate product with the same
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