By Mark Ragland,
Senior Vice President, Consumer Mortgage Sales Manager
Amid record-high home prices, fixed mortgage rates have nearly doubled over the last year, making it increasingly challenging for prospective homebuyers to buy their dream home. To overcome the higher entry barrier to the housing market, many are turning to adjustable-rate mortgages (ARMs) to lower costs and afford more expensive homes. According to the Mortgage Bankers Association, ARMs now make up nearly 13% of new mortgage applications, up from 3% at the beginning of the year.
Adjustable-Rate Mortgages (ARMs)
With ARM rates averaging about 100 basis points below fixed mortgage rates, the reason for the surge in ARM applications is clear. The rate on the most popular ARM is currently about 83 basis points below the rate on a traditional fixed-rate mortgage, which can significantly affect affordability. However, prospective homebuyers need to understand how ARMs work and how to shop and compare products.
How do ARMs Work?
An ARM is a mortgage loan with an interest rate that adjusts up or down throughout the loan term. The initial rate generally starts out lower than a fixed-rate mortgage and is fixed during an initial period. After the initial period, the interest rate can adjust depending on your loan terms and the interest rate environment.
ARMs also include rate caps which offer some protections against rate increases. The initial cap limits the rate hike at the first adjustment. A periodic cap limits the rate increase from one adjustment period to the next, and a lifetime cap limits the amount of rate increases or decreases throughout the loan term.
Generally, with an ARM, the borrower risks being unable to afford the higher payments after the rate adjusts. On the other hand, if you don’t expect to be in your home for more than a few years, getting a fixed rate mortgage could cause you to pay thousands of dollars in additional interest that you could have avoided with an ARM. So, it’s essential to carefully assess your financial circumstances and your objectives in owning a home to determine if an ARM is right for you.
How to Shop and Compare ARMs
The internet makes it easy to shop and compare ARM rates, though what is advertised is not likely to be the rate you are actually offered. And while the promise of quick approval through online lenders is tempting, you never really know what you’re going to get in terms of hands-on, personalized service. There’s much more to shopping and comparing ARMs beyond rates and promises of a quick turnaround.
Even if it’s not your first time buying a home, the mortgage application process can be overwhelming, so it’s comforting to know that you have a lender working diligently in your best interests. While online lenders and big banks can be capable and efficient, they lack several of the critical attributes offered by local lenders, including:
Personal Service: Applying for a mortgage can be stressful, especially when you can’t get in touch with a Mortgage Loan Officer when you need one. At local lenders, homebuyers are assigned a Mortgage Loan Officer who handles their case from start to finish, overseeing each step with care and concern for their needs and circumstance. They’re typically available for quick answers to your questions by cell phone or text.
Local expertise: Mortgage Loan Officers at local banks are members of your community, giving them keen insight into the housing market in your area. They understand property values and the local economy better than online lenders, and can apply their special knowledge to find the right lending solution for your circumstances.
Solid reputation: Whichever path you take to secure a mortgage, the lender’s reputation and track record should be paramount in your search. Look for a local lender with a history of closing loans on time with the least amount of friction. You can find customer reviews online and ask your realtor, who likely has a good relationship with some local lenders.
Advantages of Choosing a Portfolio Lender
Often, borrowers who are self-employed, looking to buy a house as an investment, trying to finance an unusual property, or who simply have less than great credit, can have difficulty finding a lender offering decent terms for a mortgage. A portfolio lender may be your solution. These lenders, who are often community banks and credit unions, do not sell all of their mortgages on the secondary market, and instead retain some mortgages in their portfolios. Guidelines for these nonconforming loans often are less strict and can offer more leeway to borrowers on underwriting standards, property type and other criteria. Burke and Herbert Bank is a portfolio lender with years of experience helping borrowers with a wide range of borrowing situations and needs.