Adjustable Rate Mortgages Explained - ARM Loan - First Time Home Buyer
https://www.youtube.com/watch?v=G9QIDbe2_F0
Adjustable Rate Mortgages (ARMs) are a topic of great debate in the real estate world. In this guide, we'll dive deep into ARM loans, discussing why some experts, like myself, do not recommend them for first-time home buyers. We'll cover the basics of ARMs, the current market trends, and the potential risks associated with this type of mortgage.
An Adjustable Rate Mortgage, or ARM, is a type of home loan where the interest rate is fixed for an initial period, typically three, five, seven, or ten years. After this fixed period, the interest rate adjusts periodically based on a specific financial index.
In recent times, ARMs have gained popularity due to rapidly rising interest rates. Lenders promote ARMs for two primary reasons:
Now, let's discuss why ARMs might not be the best choice for first-time home buyers:
In conclusion, while ARMs may seem attractive due to their lower initial interest rates, they come with risks that can impact your financial stability in the long run. As a first-time home buyer, it's crucial to consider your long-term financial goals and stability before opting for an ARM. A 30-year fixed-rate mortgage often provides more security and predictability, making it a safer choice for many home buyers.
Remember, making informed decisions about your mortgage is essential to achieving your homeownership and financial goals. If you have questions or need further guidance, consult a qualified mortgage professional to explore your options and find the best fit for your unique situation.
https://www.youtube.com/watch?v=vDTSwGvsyRY
Today, we're going to be talking about adjustable rate mortgages, and I'm going to be talking about why I don't like them and why I personally do not suggest them to clients. I don't promote them. I'm actually hoping that a lot of people watch this video and really take time before they decide to go with an adjustable rate mortgage because what I'm seeing right now is I'm seeing way too many lenders pushing this product without properly explaining it to the clients or the long-term potential consequences.
Okay, first of all, homebuyer 101, what is an ARM? It's an adjustable rate mortgage, and it generally works like this: it will be fixed for a period of time, so perhaps it's fixed for three years or five years or seven years or ten years, and then after that, the rate adjusts.
Lenders are pitching that product really hard right now because rates have gone up so quickly in such a short period of time. It's been a volatile year of rates; it's been very scary for first-time homebuyers, it's been scary for lenders. You know, the amount that rates have increased is jarring. And generally, adjustable rate mortgages, the interest rate is slightly lower. The reason the rate is lower is because you're only locked for a certain period of time. People go, "Oh well, if it's lower, it's better." No, no, no, no. So we're going to get to that, and we're gonna really dig in.
So there's been a lot of advertisements, and I think you guys need to watch out for these types of ads. If you see an ad and a lender is saying this, it's the one that kills me, like, it just makes me so nauseous: "Marry the house, date the mortgage." Okay, guys, I don't want to marry a house, and I definitely don't want to date a mortgage. Like, that is so cringy and terrible. First of all, if a lender is doing that marketing, you shouldn't work with them just for the cringe factor. Secondly, dating a mortgage means, "Hey bro, we know that you're gonna need to refinance." Okay, so the two reasons lenders are pitching this product right now is the rate's a little bit lower, and it will make the payment a little more palatable for you, meaning you'll be a little more comfortable with the payment. And the reason they also love it is because you're guaranteed to refinance. Yeah, you're guaranteed to refinance, my friends. People don't stay in these mortgages forever, and the way that they'll pitch it is they'll go, "Let's say your name's Becky. Becky, I mean, are you gonna live there forever? The average homeowner like sells their house or refinances within seven years, so let's just do like a 10-year ARM or a three-year ARM, and then we'll just refi. But honestly, you're gonna sell that house by then." Guys, there's no crystal ball as to when you're gonna sell a house.
And look, if the interest rate difference between a 30-year fixed and an ARM was like two percent or something amazing, I would probably have a better sense of humor about it. But let me give you a little bit of my background, and then I'm going to tell you some of the reasons an ARM is not a good reason. So, I came into the business in 2007. Yes, right before the entire mortgage market blew up. That is what I grew up in, and when I started in the business, I was at Washington Mutual. They went out of business. I went over to Countrywide, which became Bank of America. As a newbie, my whole job was answering the phone when people were in trouble. Okay, what I noticed about those calls is the people in trouble were not in 30-year fixed loans; they were in adjustable rate mortgages.
Now, are the adjustable rate mortgages now the same as then? No, they're not as predatory as they were back then. Back then, they were, you know, pretty darn predatory. Very complicated, pick-a-pay, you know, beyond, like, below-interest payments, all sorts of crazy stuff, right? But the bottom line is the average American consumer does not understand what an adjustable rate mortgage is, what index it's tied to, or how it works, nor do they understand the potential problems they might have long term.
Let's go over what a couple of those are. Number one, you will be refinancing, period, unless you sell the house. You're gonna end up refinancing nine out of ten times. Okay, and that's what the lender is counting on. So you may be like, "Okay, big deal, I refinanced." Jen, why do you care so much? Well, because this is what I see a lot. I'll have people calling me to get out of ARMs. I'll look at their income; they don't qualify anymore. They don't qualify to refinance. Just because you got the mortgage originally doesn't mean you're going to qualify to refinance. Think about if right now you're working but you're going to retire in five years. You get a seven-year ARM. You're retiring in five years, and you're gonna refinance on year seven. You probably don't have the income. You may, you may not, but your income is going to change from working to retired, so you can end up with retirees where they don't qualify for their mortgage anymore, and they're stuck. Okay, that's one.
Number two, what if you change the way you get paid or your job? That's another one. So let's say that originally when you bought the house, you were a W-2 employee, meaning that you worked for a company and you got paid a salary. Okay, will you go to refinance out of that ARM because the rate's starting to go up, right? Well, you just started a business. Guess what? You have to wait two years.
Let's say originally you buy the house with the ARM, and it's you and your spouse, right? Well, one of you guys stops working because you guys have 14 children. Congratulations. Um, guess what? You go to refi; you don't qualify anymore. You know, it doesn't matter if you make the payment every month. It doesn't matter. We're gonna look at your debt-to-income because as federally, that's what we're required to do. So personally, okay, and it's funny; it always makes me laugh. So I've always done 30-year fixed on my own homes. Um, I always will do a 30-year fixed on my own home, period. I am not going to play the ARM game because I've seen it go bad way too many times.
What if I bought a house right now, but my income declines because of the mortgage market? How many mortgage lenders hit that last year, right? Think about the field that you guys are in and the possibility for an income decline that can make it so you can't refinance and get out of that ARM. Okay, another thing that we'll see is we'll see people who are in the United States on work visas, and they may work for companies where it's normal to work in the United States for a couple of years, then maybe Australia, you know, maybe the UK. Well, guess what? If you're here on a work visa, you buy a house, you go back to another country, right? It's not as easy to refi. It's not. It's that simple. So it's like, you know, if I have a client who's here on a work visa, I'm always going to pitch a 30-year fix because what I see a lot of is I'll see that they want to keep that property long term, maybe turn it into an investment property and refinancing can be a challenge depending on where they are located now.
Okay, so that's something to keep in mind too is what is my long-term career strategy and how could this affect it? Now, here's the other thing that I think is really important. So I talk, I actually don't talk about this a lot, I should, but I don't want to be like a clickbaity channel. Um, I've really tried to stay away from that. So I have like four videos,
"Hi, guys, um, how to build wealth through real estate," you know, it's something you see all the time, but it's pretty simple. It's like you buy a house, you live there for a couple of years, you turn it into a rental, and buy the next house with another owner-occupied low down payment and on and on and on.
Now, the key to that, right, is you don't want to have to refi these properties. Like, if I was going to be doing that method right now, I would be buying a house, you know, five percent down. I would live there for a couple of years. I would do a 30-year fixed, right? Because then when I go to buy my next house with five percent down, I'm just gonna turn this one into a rental. I don't have to refinance. That's what you guys need to know. If you guys get an owner-occupied mortgage now and you switch it into an investment property, 5, 10, 15, 20, 30 years down the road, you don't have to refinance. The only time you'd be refinancing is if you were taking cash out, which I'd advise against. I would always say try to stack cash so you don't have to touch the equity because you definitely want that property to cash flow.
Um, or if you have an ARM that's adjusting. So great, you buy this house, you did it with an ARM, you move to the next one, you move to the next one. Guess what? This ARM's up. Okay, cool, you're going to be doing a refinance now as an investment property, which is going to have a higher rate. Okay, who knows where rates will go in the future? No one. No one. I mean, look, there's 20 people on TikTok that will tell you, but no one. But at the same point, every time you refinance, it costs money. You're spending money that is stripping equity from your house. So starting with a loan up front because you're like, "Oh, it's gonna save me 20 a month." Cool, you're gonna have to refinance. How much is that refinance gonna cost? How much? So those are the reasons that I am not a super ARM fan. It's actually to the point where sometimes I'll be like, "You know what? Let me send you to someone who really loves ARMs," just because I know, you know, I'll always do what you guys want, but at the same point, you know, I've seen this go bad too many times. I've never sold a bunch of ARMs in my career. I've generally stayed away from them.
But I am the person that people call when they're having trouble with other lenders and they need help. And I have to tell you, sometimes getting out of an ARM can be a huge issue. Okay. And I haven't seen any with balloon terms yet, but I'm just gonna put that word out there. We're gonna talk about what a balloon loan is pretty darn soon. If you guys ever hear the word balloon, run the hell away as quick as you can. Okay. So look, I hope this video on why I don't like ARMs and why you may not want to do one is helpful. If you guys have questions or comments, please drop them in. I am licensed in 48 states. I would love to do your mortgage. So everywhere but Rhode Island and Utah, I am happy to help. So please give me a call, hit a link on the calendar. I appreciate you guys watching.