Adjustable Rate Mortgages Are Back In Style, But Is This Good For You?

Adjustable rate mortgages, or ARMs have made a comeback. The much-maligned mortgage is partially to blame for the bursting of the housing bubble in 2008. Despite its checkered past its now being sought after by thousands of homeowners across America. In fact in January 2019, 8.6% of new mortgage loans were ARMs. Just a year prior and that percentage was 5.5%.

There are a few reasons for the resurgence of these inherently risky loans. Today’s ARMs are less risky than the ones that were given out indiscriminately in the mid 2000s. Today these mortgages are limited in regards to the fluctuation of the mortgage rate. In addition, most ARMs today are hybrid loans meaning that they begin with a fixed period where the interest rate doesn’t change, followed by annually adjustments of the rate. Caps as well as used to prevent the rate from rising too high too quickly.

The biggest change in how ARMs are dealt to borrowers involves the initial payment. Before lenders could qualify borrowers if they could pay the nominal loan payments that accompany ARMs during the early stages of the loan. Now home lenders qualify borrowers only if they’re able to pay future payments after the rate adjusts.

Today’s ARM loans no longer change after every six months or year. One of the most popular ARMs of the past was a 2-28 loan. This means that the rate was locked in for the first two years of the loan, but then adjusted every year after that. Such a loan could force borrowers to pay an initial interest rate of 6.5% before adjusting to 13.5%, which ultimately led to thousands of foreclosures. These types of loans are no more.

Most ARMs take the form of a 30-year loan with an initial fixed period followed by a rate that adjusts annually. A 3/1 loan is the standard ARM. The three indicates the number of years that the loan has a fixed rate and the one indicates that the loan will adjust once a year after the initial three-year period.

When shopping for an ARM there are three aspects of the loan to keep in mind: index, margin, and caps.

The index is tied to the interest rate. There are dozens of indexes to choose from. Your home lender will inform you of the best index to tie to your interest rate.

A margin is the fixed amount that a mortgage rate can adjust to. This number is determined by the lender. If a margin is 2%, when the LIBOR index is 2.5% the loan cannot go above 4%.

A cap is the biggest ally of the borrower. Caps do not allow for an adjustable mortgage to adjust higher than a certain point. Caps indicate where the ceiling is.

While it used to be the case that anyone could qualify for an ARM, lenders are getting more selective. Today, home lenders are looking for borrowers that can put a substantial amount of money down at closing and who a steady income. To learn more about ARMs, get in touch with the Affiliated Mortgage, the best Rapid City lender in town.

Adjustable Rate Mortgages Are Back In Style, But Is This Good For You?

Adjustable rate mortgages, or ARMs have made a comeback. The much-maligned mortgage is partially to blame for the bursting of the housing bubble in 2008. Despite its checkered past its now being sought after by thousands of homeowners across America. In fact in January 2019, 8.6% of new mortgage loans were ARMs. Just a year prior and that percentage was 5.5%.

There are a few reasons for the resurgence of these inherently risky loans. Today’s ARMs are less risky than the ones that were given out indiscriminately in the mid 2000s. Today these mortgages are limited in regards to the fluctuation of the mortgage rate. In addition, most ARMs today are hybrid loans meaning that they begin with a fixed period where the interest rate doesn’t change, followed by annually adjustments of the rate. Caps as well as used to prevent the rate from rising too high too quickly.

The biggest change in how ARMs are dealt to borrowers involves the initial payment. Before lenders could qualify borrowers if they could pay the nominal loan payments that accompany ARMs during the early stages of the loan. Now home lenders qualify borrowers only if they’re able to pay future payments after the rate adjusts.

Today’s ARM loans no longer change after every six months or year. One of the most popular ARMs of the past was a 2-28 loan. This means that the rate was locked in for the first two years of the loan, but then adjusted every year after that. Such a loan could force borrowers to pay an initial interest rate of 6.5% before adjusting to 13.5%, which ultimately led to thousands of foreclosures. These types of loans are no more.

Most ARMs take the form of a 30-year loan with an initial fixed period followed by a rate that adjusts annually. A 3/1 loan is the standard ARM. The three indicates the number of years that the loan has a fixed rate and the one indicates that the loan will adjust once a year after the initial three-year period.

When shopping for an ARM there are three aspects of the loan to keep in mind: index, margin, and caps.

The index is tied to the interest rate. There are dozens of indexes to choose from. Your home lender will inform you of the best index to tie to your interest rate.

A margin is the fixed amount that a mortgage rate can adjust to. This number is determined by the lender. If a margin is 2%, when the LIBOR index is 2.5% the loan cannot go above 4%.

A cap is the biggest ally of the borrower. Caps do not allow for an adjustable mortgage to adjust higher than a certain point. Caps indicate where the ceiling is.

While it used to be the case that anyone could qualify for an ARM, lenders are getting more selective. Today, home lenders are looking for borrowers that can put a substantial amount of money down at closing and who a steady income. To learn more about ARMs, get in touch with the Affiliated Mortgage, the best Rapid City lender in town.

A Little About Affiliated Mortgage

By simplifying the mortgage process and providing clients with high quality home loans, Affiliated Mortgage strives to build unified and lasting communities. For over 30 years we’ve been supplying residents of South Dakota (Rated as top quality lenders Rapid City), North Dakota, Wisconsin, Wyoming, Colorado, and Arizona with low mortgage rates that enable them to achieve the milestone of owning or refinancing their own home.  We are headquartered in Rapid City, SD and we are the top mortgage loan provider to a variety of surrounding cities including, Ellsworth Air-force Base, Box Elder, The Black Hills, Ashland Heights, Rapid Valley, Black Hawk, Piedmont, Sturgis, Deadwood, Lead, Keystone, and Belle Fourche.  We also have a trusted presence in Sioux Falls, SDSpearfish, SD,Pierre, SD, Fargo, NDBismarck, NDCasper, WYGillette, WYCheyenne, WYDenver, CO, and Phoenix, AZ. Our trusted reputation is built on our sincere resolve to build relationships of trust, respect, and accountability. Our chief goal is to provide clients with the best loans possible so that we can welcome them into our communities. If you are looking for the best mortgage companies near you, Affiliated Mortgage is your answer.

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