fbpx
Housing Affordability – Call to ARMs
Housing Affordability is negatively affected by both rising home prices and mortgage rates. A 20% increase in nominal home prices and a 2% increase in the 30-year fixed rate mortgage since January have contributed to a 46 point drop in the NAR Housing Affordability Index. The Index was 143 in June 2021 and is 98.5 […]
Housing Affordability – Call to ARMs
Housing Affordability is negatively affected by both rising home prices and mortgage rates. A 20% increase in nominal home prices and a 2% increase in the 30-year fixed rate mortgage since January have contributed to a 46 point drop in the NAR Housing Affordability Index. The Index was 143 in June 2021 and is 98.5 […]

c3a7a886-c756-4b58-94d5-93a09371c0f8.jpg

Housing Affordability is negatively affected by both rising home prices and mortgage rates. A 20% increase in nominal home prices and a 2% increase in the 30-year fixed rate mortgage since January have contributed to a 46 point drop in the NAR Housing Affordability Index.

The Index was 143 in June 2021 and is 98.5 in June of 2022. The Housing Affordability Index indicates whether a median income family can qualify for a mortgage loan with a 20% down payment and 25% qualifying ratio for monthly housing expenses to gross monthly income.

100 points is considered the tipping point. As the Index rises above that point, housing is considered more affordable and as it declines, it is considered less affordable.

With affordability threatening to limit buyer’s ability to purchase, more borrowers are considering an adjustable-rate mortgage. For the last ten years, fixed-rate mortgages have been so low, only about 3% of borrowers used adjustable-rate mortgages.

There is a lot of misinformation about ARMs that keeps some would-be buyers from even considering them. Even before the housing crisis of 2007, many safeguards were put into place to protect borrowers.

"As long as the ‘spread’ between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power ‘boost’ over the 30-year fixed mortgage rate." Mark Fleming, First American Chief Economist

The potential ARM candidate is probably not a first-time homebuyer. They should be tolerant to risk and more financially savvy with predictably increasing income. These buyers may recognize that they do not intend to stay in the home for a long time.

Adjustable-rate mortgages, generally start out at a lower-rate than a fixed-rate but can adjust, up or down, based on an independent index plus a specified margin and anniversary date that are referenced in the note. Most ARMs have stated interest rate caps that limit the amount of adjustment of the rate both on a periodic basis and a lifetime. FHA ARMs have a limit of 1% per adjustment period and a 5% lifetime cap over the original note rate. Conventional loans, more commonly, have a 2% per adjustment period and a 6% lifetime cap.

A particularly popular type of adjustable-rate mortgage is referred to as a 5/1 which means the rate for the first period lasts five years and then, each adjustment period after that is for one year. This allows a buyer to have stability in the rate during the first five years. If they plan to sell in less time than that, they will not have to deal with the adjustment.

A 5/1 ARM will have a lower payment for five years because of the lower initial rate and assuming a worst case scenario, a conventional ARM could increase a maximum of 2% at the end of the first period which would put the rate at higher than the fixed rate at the time they started. However, that is not where the breakeven point occurs. It is not until all the savings from the initial period have been exhausted, that the ARM will become more expensive than the fixed-rate alternative.

An ARM Comparison can help buyers to determine breakeven point. Let’s compare a 5.66% FRM with a 4.51% 5/1 ARM with 2 and 6 caps. A $450,000 30-year term loan amount will have a P&I payment of $2,600.41 for the fixed compared to $2,286.76 for the ARM. The $317.65 monthly savings will accumulate for 60 months plus a $6,673 lower unpaid balance on the ARM due to a lower interest rate.

The total savings in the first period would be $25,732. If you assume that the payment would increase to the maximum at each adjustment period, the breakeven point will occur at 7 years and 4 months. If you were to sell the property prior to the breakeven, the ARM would produce a lower cost of housing.

One of the benefits for lenders making adjustable-rate mortgages is that they have less risk because the yield can change to reflect the current market. Most ARMs must adjust down as well as up which means if rates do come down, the buyer can continue with the ARM at a lower rate or convert it to a fixed-rate at the, then, current rate.

Use the ARM Comparison to see where the breakeven point will be for you. Get mortgage rates for FRM and ARM mortgages from Freddie Mac and download our Buyers Guide.

LIST OF BLOGS

Offer My House Without A Realtor

Offer My House Without A Realtor If you're believing, "I ought to offer my home without a real estate agent," the existing property market and surge of the Internet will make your task simpler. Offer My House Without A Realtor If you are seeking to offer a home...

What You Don’t Know About Real Estate Buying (3 )

What You Don't Know About Real Estate Buying Being in the market to buy genuine estate can make you feel a bit susceptible and baffled. Listed below you will discover some of the finest pointers out there! One crucial idea when it concerns realty, is to follow your...

Tips to Avoid Pitfalls in Owning Investment Rental Property

Tips to Avoid Pitfalls in Owning Investment Rental Property Operating and owning financial investment rental home can offer a variety of essential benefits. There are prospective drawbacks to owning rental home; nevertheless, you can assist to lessen possible risks by...

What Is A Rental Property Tax Deduction

What Is A Rental Property Tax Deduction A rental home tax reduction is any expenditure that develops from owning a rental home. Some other home tax reductions that the majority of individuals forget about are charges for an accounting professional, costs for an...

Property buyer’s Loan Guide

Property buyer's Loan Guide If you are a very first time property buyer, there are a couple of points on a loan for property buyers that you must keep in mind. The tips to a loan for property buyers are:1) Work out your cost and the payment that would develop up...

Dealing with a1031 Exchange

Dealing with a1031 Exchange There are numerous methods to benefit off of owning home and being associated with realty. Not just does this originated from discovering the ideal residential or commercial property, individuals and loans to deal with, however likewise...

Purchasing A House After Bankruptcy – Things To Consider

Purchasing A House After Bankruptcy - Things To Consider Insolvency can make getting any sort of funding far more challenging. It's not difficult any longer to get funding, even a couple of days after the discharge of an insolvency. Is getting a loan quickly after an...

Adapting to Life’s New Chapters

All of us encounter major life events and they have the possibility of disrupting our lives temporarily, if not permanently. The homes we live in may have met our needs originally but due to a change in our life, it may no longer be adequate or the best fit for us,...

My spouse and I are rather conservative in our beliefs

My partner and I are rather conservative in our beliefs We were amazed when our child came home from college and revealed that she was going to take the inheritance that she got from her godmother and purchase a home. She stated that she saw a home for sale close to...

RECENT POSTS

ABOUT  TWENTY
THREE HOMES

The Twenty Three Homes are one of the premiere real estate groups locally, nationally and internationally, specifically dealing with high-end properties and exclusive clientele. Partner with Keller Williams Twenty Three Homes are full service real estate experts whose clients benefit from the custom tailored, hands on service while receiving all the exclusive amenities and resources of one of the most established and respected firms in the business.

GET IN TOUCH