There isn't a week that goes by that I don't find myself sitting down and having a preliminary meeting with a would be home buyers in Durham, Chapel Hill or Cary. I generally enjoy these meetings, their low key and give both they and I a chance to meet one another and simply have a low key conversation about what it is their ideally looking for.
These initial meetings also give me the opportunity to explain the home buying process to them, give them samples of all the paperwork their going to encounter regardless of whether they decide to work with me or someone else, answer any questions they might have and in most instances get them started in getting pre-approved for a mortgage. This way they are in the strongest possible position when the time comes, and they are ready to make an offer on a home in the Durham NC area.
One of the things I routinely suggest is that they consider speaking to their lender about an Adjustable Rate Mortgage or ARM and frequently I'm met with immediate resistance. I believe this stems from the generally terrible job the media did when reporting on the “housing crises” of 2008-09, when so often they would relate horror tales of home owners who's rates were adjusting upwards of 3-5% and who were losing their homes. The truth is these were not conventional ARM's but rather Negative Amortization Mortgage Loans; or home loans in which the Durham home buyer got a period of time in which their payments were not even covering the actual interest due on the loan let alone any of the principal; so when it came time to adjust they found themselves facing huge increases as the time had come to pay the piper.
I typically recount my own personal experiences. I took a 5 year conventional ARM when my wife and I bought our current Durham home in 2004. At the time the interest rate was 4.5% or almost 1% less than a fixed rate loan. I enjoyed this low rate for the first five years and then it began to adjust and with each adjustment my interest rate kept falling. At one point I was paying 2.25%. Remember prime rates at this time were essentially zero. I let my rate “float” for over 3 years beyond the initial 5 year period before just last year refinancing at a great fixed rate for 10 years.
For the vast majority of home owners a 7 or 10 year ARM is an excellent loan product as statistically most homeowners will be selling their home within this time frame so the adjustment rate never even comes into play. When considering an ARM you need to have a basic understanding of a few key terms:
Index: The index is a benchmark measure for rates in general. Lenders most often use the posted rate of either the 10 Year Bond or the London Interbank Overnight Rate (LIBOR).
Margin: The margin is added to the index to determine your mortgage rate. It depends on the lender, but it usually stays the same. For instance, if the index was 3% and your margin 1%, your rate would be 4%.
Cap: The cap is how much the rate can increase at any one time when it adjusts.
Lifetime Cap: The lifetime cap is how much the rate can increase over the life of the loan. Look at this to consider the worse-case scenario. A common rate cap for a 5/1 ARM is 2/2/6, which means it could increase up to 2% in the first adjustment, up to 2% in following adjustments, and up to 6% over the life the loan.
Again Buyers need to consider just how long their likely to be in the house and if like many of my clients they expect to be there between 5-7 years then a 7 year ARM which guarantees them a fixed rate for during this time that's often ½ – 1% less than the current 30 year Fixed rate is a great option.
1. You Expect to Earn More
Even if you find yourself living in the home longer than the initial fixed rate period of 5,7, or even 10 years, when the loan resets into a higher rate, you'll be able to easily afford the larger monthly payment with your increased earnings.
2. You Expect to Sell Before the Rate Increases
This is the primary reason I believe ARM's Mortgages make sense. Regardless of what a home buyer may think, the national statistics are that over 75% of all homeowners will sell their home within the first 7 years of buying it. Certainly many of my clients who are graduate students or medical residents at Duke or UNC fall into this category. Perhaps you expect a job relocation or plan to renovate the home and sell it for a higher price. While you're living in the home, you can take advantage of the lower ARM rate without worrying about where rates will head in a few years.
3. Your Expect Your Family to Grow
Your family will grow within a few years, so you will move into a larger home anyway.
4. You have Poor Credit, but Are Fixing It
If you repair your credit in a year or two, you can refinance into a new mortgage and qualify for a lower rate.
5. You Expect Home Prices to Rise Out of Reach
You want to grab the home of your dreams before the price is out of reach but can't qualify for a fixed rate loan. In some Durham Neighborhoods - understanding what to look for as you are scouting out a neighborhood as an investment area is important too! Not all neighborhoods, or builders, are created equally!
6. You expect to win the Powerball
You know you're going to win and plan on paying off your mortgage in full when you do. OK, I admit this isn't really a plan at all and if this is your plan trust me, it's a bad one. I simply threw this in for some humor.
While ARM's may not be the right loan option for every buyer, they are good options if any of the above fit your personal situation and as interest rates start rising, I believe they will make even more sense to many buyers. I did a Step by Step Guide for getting a home loan, it has some more details you might find interesting!
Want some more information on Investing in Real Estate in the Durham NC market? Send us a message online, call Larry Tollen at 919 659 5173 or leave me a comment below - I answer all of these questions personally. I want to help you with your next dream home - and that means I have to know the Durham Mortgage Market!
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