ARM’s Trending Upward as Traditional Fixed Rates Climb

ARM’s were one of the many issues blamed for the housing market crash in 2007 and while they were indeed a problem; they weren’t the only problem and on their own wouldn’t have been…It was the fact that they were combined with NINJA’s that wreaked havoc.

No, I’m not talking about those Ninja’s, I’m talking about these NINJA’s.

It was primarily the No Income, No Job, No Assests “No Problem!” loans (AKA, “NINJA” Loans) that led to the 2007 crash so as long as those don’t return I think we’ll have a pretty stable market going forward.

So when I see that ARM’s are becoming more popular with home buyers it’s not exceedingly worrisome to me and it shouldn’t be to you either because ARM’s, despite some beliefs, are NOT evil. They serve their purpose and often do so very well. I myself have had two ARM loans in recent years. Why? Because I knew what the market was doing and I knew I would not be in the home I was buying for more than 2-3 years. I knew the risk was exceptionally low and I could in the end get more home for my money which also translates into more money in my pocket when it came time to sell and here’s why:

Buyer Bob buys a $300,000 home and uses an ARM giving him roughly the same monthly payment (or lower!) as buyer Susan that bought a $250,000 home and used a higher rate fixed mortgage. Now, three years later they go to sell and assuming they both appreciated at exactly the same rate and they used the same % down payment, at the end of 3 years Bob gets $7,881.25 more into his pocket than Susan. Of course Bob had to put more down right? Yup, on a 5% down that’s $2,500, so pull that out…He’s still $5,381.25 better off than Susan. Of course he likely paid a little more in property taxes (maybe 1/3 of that $5381) but he was in a nicer home during that time too and in the end, it cost him LESS for that $300,000 home than it costed Susan for that $250,000 home. Not a a bad deal right?

Of course, this only works for a home you know you won’t be in for very long (my current home I should be in for at LEAST 10 years or longer, we plan to remodel it, add-on etc) so we’re in a fixed mortgage on this home; as that’s the best use of a fixed rate mortgage.

It’s just a matter of the right tool to do the job and being educated on the market.

So ARM’s are becoming more popular and rising, but it shouldn’t be scary…it’s fine…The sky isn’t falling!

Your Portland Realtor, Scott McDonald

Everything. Portland. Real Estate. Blog.

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