Over the last several weeks, the 3 and 5 year ARMs have become increasingly competitive.  Allow me to digress…

Several years ago, the mortgage industry went through a transformation.  The banks were printing money and lending it with little or no documentation.  Anybody could get a loan and buy a house.  Subprime lending allowing borrowers with a FICO score as low as 620 to obtain 100% financing reached its peak in 2006.  To further the ability of marginal borrowers to obtain financing, lending institutions also offered an abundance of adjustable rate mortgages, thus referred to as ARMs.

The 3 & 5 year ARM products are loans that although are amortized over 30 years, the rate is only locked for 3 or 5 years respectively.  In months 37 & 61 respectively, the rate general will go up 2 points and 1 point annually with a maximum of a 5 point increase for the remaining life of the loan.

These arms were generally priced a full point lower than your 30 year fixed.  This would allow an individual who could not qualify at the 30 year fixed rate at 6.5 to get financed at 5.5%.

These ARMs have reset in the last few years and will continue to reset over the next few years.  Borrowers can no longer refinance because property values have decreased and credit guidelines have tightened.  A large portion of foreclosures are these ARMs that have reset, thus putting the payment out of reach for many consumers.  Therefore, the lending institutions started pricing their ARM products at par with their 30 year fixed products.  It made no sense to get a 5 year ARM when you could get a 30 fixed rate.

Well, now that 30 year fixed rates have gone up from and average of 4.875% to 5.625%, the refinance boom of late has ground to a halt.  The lenders, in their infinite wisdom, have decided to offer these ARM products at the average rate of 4.5%.

This is a tremendous rate that can be locked in for 5 years, but only borrowers who are in control of his or her finances and are aware that in year 6 this rate may go up two points should be obtaining this type of financing.

Raichart Out….