Mortgages - Rethinking Adjustable-Rate Mortgages - NYTimes.com Page 1 of 3
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MORTGAGES
Rethinking Adjustable-Rate Mortgages
The New York Times
By BOB TEDESCHI
Published: August 27, 2010
Adjustable-rate mortgages, or ARMs, got a bad name in the recent
credit crisis, as underqualified borrowers lured by years of low fixed-
interest payments fell behind when interest rates rose.
But if you took out a five-year ARM,
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which has a fixed rate for the first five
More Mortgages Columns
years, in mid-2005, that risk would
have paid off. Compared with a 30-
year conventional loan at the prevailing rate of 5.64 percent, a loan of
$417,000 would have saved you roughly $10,080 in mortgage
payments by now, assuming a five-year ARM rate of 4.99 percent, said
Michele Raab-Francis, chief executive of Safe Harbor Capital, a
mortgage broker in Bellport, N.Y.
With mortgage rates and many financial indexes low, and the economy showing no signs of
a quick recovery, current ARM borrowers face an interesting choice. If they keep their
loans, they may well have lower payments in the next year than those who have fixed-rate
loans.
http://www.nytimes.com/2010/08/29/realestate/29mort.html?_r=2&ref=realestate 9/2/2010
Mortgages - Rethinking Adjustable-Rate Mortgages - NYTimes.com Page 2 of 3
After the initial period, most ARMs are adjusted annually, at rates typically tied to one of
three indexes: the one-year Constant Maturity Treasury Index; the Cost of Funds Index,
known as the Cofi; or the London Interbank Offer Rate, known as the Libor. Borrowers
whose ARMs are linked to the Treasury Index, for instance, would face one year of
payments at a roughly 3 percent interest rate, according to Keith Gumbinger, a vice
president of HSH Associates, a financial industry publisher and consulting firm. The
Treasury rate may remain low since it generally rises when the economy strengthens.
Another option is refinancing to a fixed-rate loan while rates are at historic lows. Ms.
Francis says this is especially popular with borrowers who have ARMs adjusted according
to other indexes or have terms that allow for sharper interest rate spikes. But the cost of
refinancing may be steep, especially in New York, where borrowers must pay a mortgage
recording tax.
Ms. Francis suggested one other choice: converting the terms of an ARM with a current
lender.
That is more feasible for borrowers who took out loans from regional banks and
depositories instead of larger lenders like Citibank. Depositories tend to keep the
mortgages on their books instead of selling them to investors.
Ms. Francis says these institutions will sometimes convert an ARM into a fixed-rate loan
for a flat fee amounting to much less than the closing costs of refinancing. “It’s definitely
worth it to at least call your lender in that circumstance,” she said.
For borrowers who want a jumbo loan — $729,750 or more in the greater New York area —
an ARM may make more sense than a fixed-rate loan, she said.
Borrowers with excellent credit who need a $2 million loan, for example, can qualify for a
3/3 ARM, in which the rate resets every third year, at roughly 3.125 percent. That saves the
borrower around $100,377 over three years, and when the loan adjusts in the fourth year,
the rate can increase to no more than 5.5 percent — the same as the prevailing fixed rate
jumbo loan today.
Some ARM borrowers hoping to refinance to a fixed-rate loan may be rejected if their
homes are found to have lost too much value. But Anthony Hsieh, chief executive of
LoanDepot.com, an online lender, said they might qualify for new loans.
For instance, Fannie Mae and Freddie Mac administer the federal government’s Home
Affordable Finance program, in which borrowers whose mortgages exceed their homes’
value by as much as 25 percent may still qualify for a new loan. To qualify, a borrower’s
current loan must be owned by either Fannie Mae or Freddie Mac. (You can find out if that
is the case at fanniemae.com/loanlookup, or freddiemac.com/mymortgage.)
Borrowers must also be current on their loan payments, and the new loan must be deemed
to put the borrower in a more financially stable situation than the old mortgage. Partly for
that reason, borrowers whose mortgages exceed the value of their homes by more than 5
percent cannot refinance to an ARM.
A version of this article appeared in print on August 29, 2010, on page
RE9 of the New York edition.
http://www.nytimes.com/2010/08/29/realestate/29mort.html?_r=2&ref=realestate 9/2/2010