History & Case for A.R.M.s
(Adjustable Rate Mortgages)
By Joe Hand:
Over the past 30 or so years, interest rates have continually climbed upward, subject to several short-term downswings,usually
approaching presidential election years. The major cause of rising, and fluctuating,rates, is government borrowing, and open
market operations, The main sources for residential loans, Banks Savings and Loans Institutions, and the secondary market
(FNMA, FHLMC, GNMA) borrow their funds on short-term instruments. Savings accounts, Certificates,Money Market Funds, t-Bills,
and Stock purchase all have limited interest rate "Lock-ins). Those borrowed funds of the institutions have historically been lent back
out on long-term "Lock-ins) called 30 year fixed rate mortgages,
When the short-term instruments go up in price (rates increase) and lenders are stuck with fixed rate incomes, the spread and
margin diminishes, and sometime disappears altogether. Many institutions still hold long term notes at 5% to 7%, and the cost of
those same fund to the lender are 9% to 18%. Many institutions have gone broke, and many more almost so, in the past 5 to 7
years because of their inability to operate profitable, due to fixed-rate long term lending policies.
The Adjustable, or Variable Rate loans were devised to allow lenders to vary their price of loans based on the coast of their money.
Thus, indexes were established to reasonable reflect what the actual cost of funds to the institutions are. Margins are established
on top of those indexes as a "profit margin" to be maintained during the opposite is also true, a fair arrangement. Many economists
and analysts forecaster 4 to 5 years age that by now we would have seen the end of fixed-rate loans. The United States of America
is the only country in the World in which a borrower can still borrow 80% to 95% of his home price, at a fixed rate, for 30 to 40 years,
with no option for change to the lender. We don"t see many private lenders offering this option.
Some lending institutions have claimed that if there were not fixed rate loans still in their portfolio from the past 30 years, by as
much as 3%, without nearly the threat of increasing over a few years. New borrowers today indeed pay the price for the mistake
lenders made 10 to 30 years ago.
The rate differential between the beginning of an A>R>M> loan and a fixed rate loan can vary by as much as 3%. The reason is that
the lender can make the change later as needed with the ARM loan but he is stuck with his chosen rate on the fixed loan for the next
30 years, a dangerous position to be in. Would you take that risk?
A fixed rate loan can be a blessing for many borrowers, but there is indeed a market for adjustable rate loans. There are many
circumstances in which an ARM will work better for the borrower.
Indeed, it is safe to assume that the advent of literally dozens of new ARM loans is indicating a certain demise to the "good old 30
year fixed rate home loan". However, there are many dangerous adjustable loans available in the market place, and they are not
subject to much government regulation (yet). Avery cautious approach to ARMs is warranted by borrowers and their agents. "Caveat
Emptor" was never a more appropriate warning.
There are some very good, safe, and usable A.R.M. Loans available for borrowers today.
The Indexes ( Examples Only)
TREASURE SECURITY RATES:
6 Month
1 Year
3 Year
5 Year
FHLBB COST OF FUNDS INDEX ( 11th District)
FHLBB CONTRACT RATE
PRIME RATE
Article written by Joe Hand
Article Source: : http://www.cyourad.com