A Curious Event in Home Financing

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These days banks are not the only ones being cautious. It looks like consumers who saw their real estate values drop, as well as their retirement accounts in the same year are using some extra caution when borrowing mortgage money. Freddie Mac reports in their 1st Quarter 2010 survey, that 95% of people refinancing mortgages this year are going into fixed rate loans. A similar percentage of purchasers are using fixed rate products as well over an adjustable rate product when buying a home. This is illogical as the average person only has the loan for seven years. This is especially curious when rates on Adjustable Rate Mortgages have hit all time lows and the spreads between the 30 year fixed and a 5 year ARM is an astounding 1% plus. As I write this, you can easily obtain a 5/1 ARM at 3.5%! On a $300,000 loan that is approximately $240 per month in interest savings or $13,500 over 5 years! That is compared to a 30 year at 4.875%!
It looks like homeowners are choosing payment certainty over payment savings. The even stranger part of this is that people generally use ARM’s for a few reasons. 1. Payment savings. 2. Will not need to borrow the money for longer than the fixed period. 3. Or maybe they are comfortable with a payment that can change in the future at least somewhat predictably which most ARM’s offer. None of the reasons why people would use an ARM has changed in the last few years. Yet ARM rates vs. Fixed rates spreads are at all time highs and less consumers are using the product. The only conclusion that can be drawn is that there has been a fundamental shift in the way consumers think about financing their homes. I understand why consumers are doing this; it just isn’t the most logical occurrence. Make sure you are consulting with a mortgage professional that can help you integrate your mortgage into your entire financial planning picture. A fixed rate may be the best tool for you. But you also may notice that if used wisely, the ARM product can be a great financial planning and savings tool for you given certain circumstances.
*It is important to note that people are not being foreclosed on because the interest rate on their ARM rose. Those rates are lower than when the borrower started hence lower payment. The loans that changed higher in payment were short term interest only or negative amortization loans where the borrower wasn’t paying any principle at first then principle became required which upped their payment. Big fundamental difference in product!


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