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What is an ARM Loan?

Here is some information on adjustable rate mortgage loans that came from a lender in our area:

Today I wanted to discuss what an ARM (Adjustable Rate Mortgage) loan is and how it works for buyers.   On Friday I locked in a 7/1 ARM at 2.625% for a client of mine. What I realized, while talking through this loan, is that few Realtors, even fewer borrowers, and, sadly, even few lenders really know how ARMs work and why they are still a good product option.   Unfortunately, after 2007, many products,  like the old ‘option-ARM’ , got grouped together and labeled as ‘liar loans’, ‘predatory loans’, or just plain bad products. That’s NOT the case. With the average Californian staying in their home for 7 years and the average American keeping their home loan for just over 5 years, does it really make sense to pay a higher rate premium to lock into a 30 year mortgage?   The answer is maybe. For our client who knows they are going to be selling or refinancing, for any reason, within the next 5-10 years, a 7/1 ARM may be the right product for them. Simply explained, 7/1 means that the loan is ‘locked’ at a specific interest rate for the first 7 years, the adjustable once a year after that.  The payment is still set up on a 30 year amortization schedule, so from day one the client is paying down principal.  Additionally, the program usually has what’s known as 2/5 rate caps.  This means that after the 7th year, the client’s interest rate can only go up a maximum of 2% per year with a lifetime cap of 5% over the start rate. So, for the client I locked in on Friday at 2.625% - who knows he is leaving the state in 5 years – this is the perfect loan for him.  He is saving $300 a month over the 30 year fixed option, he is completely locked in for 7 years, and if for some reason he gets stuck with the property or turns it into a rental, his maximum adjustments will be 2% per year with a max rate of 7.625% in the 10th years. A 5/1, 7/1 or 10/1 ARM definitely isn’t for everyone.  With 30 year fixed rates so low, I generally recommend a 30 year fixed rate as the #1 option.  However, for certain clients, a fully amortized ARM may be the right answer. If you have more questions about these type product, give me a call.

Scott Groves Loan Officer  - Team Lead Prospect Mortgage 1660 Hillhurst Ave| Los Angeles| CA 90027 225 S. Lake - 3rd Floor | Pasadena| CA 91101

cell (818) 679-5188 |  e-fax (877) 808-9569

NMLS ID #365178

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