What are ARM Loans. Variable Rate Loans.
What is an adjustable rate mortgage or what is an ARM loan? Well, as we know, in the last year or so rates have really gone up, interest rates have gone up and still may go up. So many buyers are looking for alternatives to paying the high mortgage rates. That’s when the ARM (adjustable rate mortgage) come in where our rates are lower than your conventional loans and also 75% of all the loans are fixed rates.
But up to 25% percent of the loans are adjustable rate mortgage loans and they are very good if you need to use them. They have their advantages and they have the disadvantages. So let’s talk about what an ARM loan is and the pros and cons of an adjustable rate mortgage. So the question is when do you use an adjustable rate mortgage and why use an adjustable rate mortgage? ARMS usually are mortgage rates where the interest rate is not fixed. That’s a disadvantage of the adjustable rate mortgage rate.
But it’s used when you are unable to get a high interest rate. So let’s say you are buying a house and right now the rates as an example is 6.5% annual percentage rates. And for some reason because you have car loans or other credit card loans or a student loan, you are not qualifying, just barely qualifying with a 6.5% rate. But you really want to buy a house or income property and your lender suggests to you that hey, why don’t you get a 5.5% or 5% adjustable rate mortgage loan where you will qualify temporarily. So that’s an advantage where if you use anadjustable rate mortgage the rate is lower than a conventional mortgage usually, so you can qualify.
The disadvantage is it is not fixed for 30 years. So that means that if you have, let’s say an ARM mortgage loan known as three one or a five one or a five six, what that means is your adjustable rate mortgage is three years fixed and changes every one year on a three one loan. On a five one ARM loan, your mortgage rate is fixed for five years, then it will change every once a year. On a five six for example, your adjustable rate is fixed for five years and that will change every six months.
And these rates, adjustable rate mortgage rates are tied to different indexes and one of the indexes for example, is a prime rate or a cpi which is a consumer price index. So as the cpi or the prime or whatever index your loan is tied to increases, your rates go up and if it decreases, your rates go down. The advantage of a fixed rate mortgage is that your payments are fixed, they are predictable and you have a stable payment for the next 30 years. The disadvantage of an adjustable rate mortgage is if you have a loan for five one, your rate will be fixed for five years. But then you don’t know how high your rate may go up because it changes every year.
After that, it could go down, but in the long run, it could go up. The best thing to do is if your rates go too high. And at that time, let’s say you went from 5% rate for the first five years and it jumped to 8%, which has happened many times, and it happens all the time, jumps to eight or nine or ten percent, then your payment almost doubles, or more than 1.5 times your payments, depending on the rates. Then at that time you can adjust or refinance your loan to a fixed rate or a different kind of adjustable rate. But that I’m not going to get into details. By the way, I’m not a lender.So if you have any specific questions,talk to a lender who’s certified to do loans.
I’m just giving you general information on what an ARM loan is because as a realtor, a lot of the buyers come to me and they want to buy a house, but they can’t qualify. And we suggest that there are conventional loans, fixed rate and adjustable rate loans. So you have an option. So I don’t want to talk too much details on it, but wanted to give you a basic idea of what an ARM is. So let’s continue.
The other advantage of using an ARM loan, adjustable rate mortgage loan is let’s say you already have a house and you are trying to buy income property, or you have a house and you have income properties and you want to buy more income properties. Of course it’s always advantageous to buy a fixed rate mortgage because your rates are going to be the same. So if you buy, let’s say a rental home and you buy a fixed rate mortgage at 5% and your payment is $3000 a month. So for the next 30 years, your payment is going to be $3000 a month regardless of the changes in the rates on the market. Because your rate is fixed, but the option to use or when would you use an ARM in this situation?
Let’s say I already have one property, my house, and I already have another rental property and I want to buy another one because I have some down payment. But because I have two mortgage payments, I have a credit card payments, I have a car payment, I’m not able to qualify for a fixed rate, let’s say 6.5 in today’s market. So I could opt to go on a three one or a five one or a ten one, where the rate could be 4% or 5% for the first five years. And I may consider, you know what, let me get this house, at least I can qualify and buy it because I have the down payment, I have a good job, I have good income, but in five years, if I wait, I may not be able to buy. So if I buy the house now or the rental property now, and as long as I know that I can refinance before the five years where the rate is probably going to go up. So then I have the good option.
So adjustable rates are good for short term, not for long term. If you want to buy something for long term, we recommend that you buy on the basis of a fixed rate mortgage for the next 30 years your payment is fixed. But if you can’t qualify or circumstances are that you have to get a fixed adjustable rate mortgage which is fixed for five years or three years or ten years, then opt for that, knowing that sooner or later you’re going to have to refinance or get another loan. The other thing you may want to check with your lender is that you may not be able to refinance right away. Some of the lenders have pre payment penalties so they may say, hey, you cannot refinance for the first year or second year.
But there’s all minor details that you should know. That’s why I recommend you talk to a lender. But if you’re in a situation, then this is a good time to get an adjustable rate mortgage loan should you need to.
Should I buy a house now or should I wait? A lot of people are listening to the media and there’s all kinds of news out there.
Don’t buy, market is going to crash, prices are going to stay high, rates are going to stay high.
So if you’re thinking about buying, obviously it makes you more confused and more resistant to buying a house. So in order for you to buy a house or thinking about buying a house six months later or a year later, you need to think of what’s happening in the market. And you you need to plan what’s best for you as a buyer, not in general, what the media is talking about. And in general, the media is usually negative or they always talk about doom and gloom. And I’m not talking about the media in just terms of news channels. I’m talking about all of social media, all the other YouTube channels. And there are a lot of negative YouTube channels saying houses are going to crash. They’ve been saying that for three or four years.
Scared the heck out of a lot of buyers. Those buyers have not bought. So stay tuned. I’m going to talk about why this may be a good time to buy. Despite the fact that the home prices are high, I’m quite aware of that. And despite the fact that interest rates have gone up from a low of 2.5 to a high of 7.5, I also know that the rates were in the high of 18% 20-30 years ago. They’re down to 6.5%. So stay tuned.
Let’s talk about two reasons why this may be a good time to buy.
So the first thing you need to know about real estate, if you’re thinking about buying or even selling your house and then buying another house, one thing you have to consider is that real estate market is local real estate market is different to you versus it’s to me. Because even though we may be in the same area, we have different scenarios.I just sold a house to a young couple who bought a house regardless of the price because they inherited $300,000. So they bought a million dollar house, put $300 down, so the price did not really matter. I have a buyer who’s looking for a house right now in the million dollar range. By the way, in Orange County, the median home price in Orange County or Anaheim Hills where I live, is just about a million dollars. So a lot of my clients buy a million dollar home.
So what I was saying about the other client is that they were looking for a house for a million dollars about six, seven months ago. Now they’re looking for something in the 850 to 900 range because the higher interest rate has lowered their qualification. But regardless, they are going to buy a house. So one thing, as I mentioned earlier, you have to remember is that real estate is very local. What’s happening in New York or Boston where prices have gone down maybe 10%, or in the Bay Area where prices are down 10%, maybe 15%. Where as in certain areas like Naples and in Florida prices are going up. Some areas like in South Carolina, North Carolina, Idaho, Montana, some areas of Texas are still going up whereas prices in Austin are coming down.
So what applies to one market does not apply to you. So when you hear about the doom and gloom about what’s happening in Austin or New York or some other places does not apply to you because you are local. But let’s assume that prices have gone up and here are the two reasons why there’s fear of buying a home, why there’s a resistance of buying a house. The first resistance is that obviously we all saw the market crash in 2008. In 2008 that was a huge crash. It scared a lot of people.
Now, 13-15 years later, we are back to the consensus or the fear or the resistance that the crash is coming back. Well, I have news for you, the 2008 housing crash is not coming back. Let me explain to you so that you understand why this crash is not the same as 2008. So if you are thinking of buying, you want to continue the journey of buying and get your dream home.
In 2008 there was a lot of oversupply of homes. There were ten months supply of homes. Currently, even with the increase in inventory in the last six months, there’s an average of three months supply. So there’s still a shortage of homes. In 2008 era there were a lot of toxic loans that were thrown out there by lenders, let me rephrase that, by greedy lenders, by greedy banks who gave out toxic loans and that’s part of the reason it crashed. But in the five years or so, all the banks have been very tight in giving out loans. So those loans are not going to crash like you had in 2008 when there were toxic loans. So don’t expect a lot of pre foreclosures or short sales or REOs coming in the market because the people who bought had really good loans and despite the fact that they may have a few bad loans here and there, the equity, which is my next point, the equity has gone up in the last six, seven years. A lot of homes have doubled in the last ten years. So even if they lose their loan or they cannot make their payments, the equity can carry them for next two or three years. So that’s another reason why we are not going to have a crash like 2008.
The other reason, like I said, is equity. A lot of equity out there. But the fourth reason is there’s alot of inheritance money out there. A lot of baby boomers have a lot of money. So let’s say somebody was losing a house. The grandpa or the uncle or the brother or the dad can help them out with the additional payments if they’re behind three months or four months or five months. So there’s a lot of rescue efforts out there. So there’s no housing crash like there was in 2008. So if you’re thinking about buying, keep thinking about buying. Get a plan, get a deadline, talk to a lender, talk to a realtor, feel free to call me and I’ll refer you to great agents in your neighborhood.
But I would say it’s a good time to buy. But let me give you why this is a good time to buy. Again, I’m going to repeat, despite the fact that home prices are up, I’m quite aware of it. I hear it every day from buyers. Rates are high. I’m aware of it. So why is it a good time to buy now? Well, here’s a very good reason. The best time to buy if you’re thinking about buying and if you have a motivation to buy and if you have a need to buy, there’s a saying that the best time to buy is when you are ready, willing and able to buy.
So do you have the motivation to move in the next six months to a year? Are you getting a promotion? Do you want to move near your families, near your mom and dad? Do you want to get closer to your friends? Do you want to move to a beach area or nicer area, or a rural area or a metro area? Whatever the reason, if you ever need to move, the second question is, are you able to buy? That means if you have to put a down payment, can you come up with 5% down, 20% down, 30% down? And can you qualify for a loan? Are you qualified? Can you buy a house? Are you in the right frame of finances that the lender will give you or the bank will give you a loan? So if you are motivated to buy, if you have the resources to buy, like your down payment and your qualifications, then if you are ready, willing and able to buy, go for it.
Now, you may say that the prices are up. Yes, totally understand prices are up. But did you know that statistically and historically, in the last 30 to 40 years, the average home in USA appreciates 4% per year? That means even if you buy a high priced home, it’s going to appreciate 4% per year for the next 20-30 years. So as long as you keep your house long term, your house generally will triple in 30 years. On average, homes triple in 30 years. I bought my house 25 years ago and it has quadrupled.
So what I’m trying to say is, even if the prices are high and if you need to buy and there’s a need to buy. There’s a willingness to buy and you have finances to buy. It will go up in the long run. It may come down one or two years, but it will go up. If you buy now, you’re going to triple the value of your home. So that’s a great reason to buy. Now there’s an argument there that if you pay six and a half percent of 7%, what if the rates go down?
Well, if you buy a high priced home at a high interest rate, assuming you can qualify, you can always refinance after a year, two years, three years, depending on what kind of loan you get. And hopefully you qualify at that time. So there’s a lot of reasons to buy now. The main thing is you’re fighting time.
The biggest secret in buying real estate is time. The earlier you buy, the earlier you start the clock of paying off your 30 year loan. The earlier you start your clock about getting tax advantages and appreciation. And if it’s a rental property, you get depreciation. There’s a lot of advantages even in a high priced market. In fact, in January 2023, compared to the last quarter of 2022, there have been multiple offers. So even though the prices are high, January nationwide saw a lot of homes and commercial properties and income properties seeing multiple offers. So despite high prices, there are always sales. Let me take you back to 2008 where there was doom and gloom. So many homes for market. People did not have jobs, people had zero savings. Businesses were down. But guess what happened in 2008 era, a lot of people bought homes.
So despite those tough times, a lot of people bought homes. And guess what? All those people who bought homes, maybe they didn’t triple their money or the house value. If they kept it, it’s four times or even five times the value because they bought at an exceptionally low price. So time is on your side. Prices of homes will guarantee go up, there’s no question about it. So if you’re ready, willing and able to buy, this is the right time to buy. If you need help, feel free to call me. I will refer you to an agent or give you some insights on some more ideas on buying a home. But if you have any thoughts of buying, go for it. And good luck to you.