Today’s interest rate environment can be scary for the vast number of borrowers currently in the market. A quick look back on interest rates will tell you why… The last time mortgage rates normalized around six percent predates the Great Recession, putting most Millennials in college or younger. The previous moment when the industry embraced adjustable rate mortgages coincides with this timeframe, with ARMs landing squarely in the financial disruption bucket.
This is also why ARMs subsequently received a bad rap as a consumer alternative to fixed rate mortgages. The times, however, have definitely changed and even the Consumer Financial Protection Bureau prompts borrowers to consider an ARM product in a higher interest rate environment. With refinance activity dwindling and the race to regenerate purchase business a primary strategy, it’s a great time to evaluate the advantages of ARM products.
Why ARMs?
With interest rate volatility, a higher interest rate benchmark, and continued Federal Reserve promises to maintain higher rates, mortgage originators need product options. Today’s adjustable rate mortgage products can be real game changers, especially hybrid ARMs, combining features of both fixed and adjustable rate mortgages with longer initial terms. Hybrid ARMs, encompassing 3/1, 5/1, 7/1 and 10/1 products, are typically priced more aggressively than fixed rate mortgages, creating a competitive edge.
ARM Credit standards and ability-to-repay requirements mitigate risk
Current regulation and investor requirements ensure the viability of longer-term ARM products. Subject to post financial crisis rigor, corresponding loan programs are designed to ensure originators are able to mitigate risk with aggressive credit standards, debt-to-income requirements, and ability-to-repay rules.
ARMs add homebuying power with lower initial interest rates
The pricing of hybrid ARMs, in particular 5/1 and 10/1 products, is often considerably less than interest rates on 30 year fixed rate mortgages. In today’s rising interest rate market, this price advantage can mean the difference between a borrower finding a home and not being able to compete as housing inventory remains at historic lows.
Initial rate periods for hybrid ARMs aligns with average length of time in a home
The current average length of time a homeowner remains in a house is approximately 10 years according to the National Association of Realtors. Depending on stage of life, type of job, and employment income, this average can be noticeably less, especially for first-time homebuyers. This longevity factor helps add homeowner confidence and security in opting for an ARM product.
First adjustment periods create a pool of possible refinance candidates
No, refinances are not gone, and ARM loans can help create an ongoing pool of loans within your portfolio that are preparing to resent, and therefore anxious to refinance. Converse to temporary buydowns, which offer a reduced interest rate for the first year, hybrid ARMs create a longer term relationship between servicer and borrower.
Trusted QC helps add lender confidence
Unlike many homebuyers and industry players, this is not QC Verify’s first take at ARM products… QC Verify, formerly Quality Mortgage Services, has been a trusted mortgage quality control partner since 1992. In the current interest rate environment, where the mortgage industry is inclined to revisit product options from one to two decades past, it makes sense to align with a partner that has real experience in this area. The QC Verify team understands the nuances and importance of industry regulation, agency guidance, and investor requirements as the market continues to shift in response to economic volatility. This is because we’ve never stopped understanding how ARM loans impact borrowers, QC and your organization.
The QC Verify focus has always been to be here when and how you need us, bringing meaningful industry experience and proven innovation to your QC and audit processes.
Visit QC Verify at QCVerify.com to find out how our team of dedicated quality control and audit specialists can help you navigate and leverage the benefits of adjustable rate mortgages.