Some buyers may be open to adjustable-rate mortgages in 2017

December 19th, 2016 10:31am
Review the terms of your mortgage closely.

Adjustable-rate mortgages have in the past decade been the shunned stepchild of the home loan industry, a notion that is not wholly warranted. This impression is mostly due to their perceived role in influencing and causing the housing crash in 2008, which really began showing negative warning signs much earlier.

However, in a recent article from CNBC, real estate correspondent Diana Olick noted "ARMs" could be advantageous options for savvier buyers and refinancers in 2017. 

Hidden below the rough exterior of what many believe comprise ARMs is an opportunity for buyers who don't intend to remain within the same mortgage terms for the duration of their homeownership: Buyers can opt for ARMs to start then refinance into a more secure, long-term mortgage before rates rise further or teaser periods expire. Or, as Olick stated, buyers can purchase homes at an adjustable rate, then upgrade to a newer, larger home under a fixed-rate plan once their future income rises.

Again, these options may only be applicable to certain types of buyers, and borrowers should think long and hard about where their current and future interest may lie and how to best go about obtaining the financing needed to own homes.

More to know about adjustable-rate mortgages
ARMs have historically been accompanied by certain terms that make it easier for borrowers to default, such as low introductory rate periods, loose restrictions on lending amounts and less focus on future payment potential. However, CNBC noted many of the more egregious practices employed by lenders regarding ARMs are now illegal under new regulations, so much of the stigma surrounding them is no longer valid.

In fact, ARMs are actually a full percentage point cheaper than "FRMs" in today's environment. And with the Fed dot plotting rate hikes in 2017 and 2018, FRMs will inherently become even more expensive.

So what does this mean for borrowers? For one, it could be financially beneficial for buyers to rethink how ARMs could be in their best interest rather than simply defaulting to conventional fixed-rate, 30-year loans. As loanDepot CFO Bryan Sullivan stated, it is no more difficult to qualify for an ARM than any other loan, according to CNBC.

"Mortgage qualification is determined by a homebuyer's credit score, the loan-to-value (LTV) ratio of the home loan and the customer's debt-to-income (DTI)," said Sullivan. "ARMs are typically lower priced and also have a correspondingly lower LTV ratio which may make it more difficult for potential homebuyers to qualify."

Navigating the loan landscape
The National Association of Realtors stated in a new press release that buyers are becoming slightly more disheartened in their inability to find affordable housing, a trend which is projected to continue next year. Home sales are still expected to rise, albeit minimally. And when combined with higher incomes and a potential buyer exodus from the marketplace due to high prices, those buyers who still remain may have better luck in 2017.

"Rents and home prices outpacing incomes and scant supply in the affordable price range has been a prominent headwind for many prospective buyers this year," said NAR Chief Economist Lawrence Yun. "Making matters worse, the unwelcoming reality of higher mortgage rates since the election is likely further holding back confidence. Younger households, renters and those living in the costlier West region - where prices have soared in recent months - are the least optimistic about buying."

While buyers may face certain affordability struggles in 2017, this concern only amplifies the impetus to take a closer look at loan options. When factoring in the Trump administration's stance on tax rates and federal regulations, as The Wall Street Journal reported, real estate could look quite different in just a few weeks, all things considered. With this in mind, why not review loan specifics with an experienced agent and weigh options that could not only be financially strategic but also serve as a springboard for future investment or purchasing opportunities?

For example, some borrowers utilize ARMs as short-term loan options to finance a home that suits their needs for a given period of time - if a couple had a single child it would only require a house of a certain size. But what if that same couple had  two more children within the 5-year time frame that the ARM provided low rates, and then needed to move into a larger house? Well, if a couple planned this in advance it would be smart to choose an ARM, then swap to an FRM once they purchase their forever home with their now larger household.

Regardless of lifestyle choices, income levels or future obligations, it's best to speak with a professional real estate expert to determine loan terms that are risk-averse and that maximize the ability to pay off loans in full and on time.

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