This mortgage, shunned after the financial crash, is making a comeback in the Bay Area as interest rates rise

As interest rates skyrocket, borrowers are returning to variable-rate mortgages, but much more cautiously than in previous cycles of rising interest rates.

Many experts don’t think these mortgages, called ARMs, will be as popular as they were in the years leading up to the financial crisis. Since then, ARM has largely been stripped of those risky options, but it still has a “bit of stigma,” said Bill Banfield, executive vice president of Rocket Mortgage.

The new rules also made it much more difficult to qualify for an ARM, and the initial discount compared to fixed-rate mortgages was unattractive.

Fixed-rate mortgages provide the borrower with a steady payment because the interest rate is fixed for the life of the loan.

With ARM, rates and monthly payments are typically fixed for a fixed number of years and then periodically increase or decrease in line with market rates, subject to certain limits. A loan that is fixed for five years and then adjusted annually is known as a 5/1 ARM. If it is fixed for 7 years and then adjusted every 6 months, it is called 7/6 months or simply 7/6 ARM.

Donna Weber and Ed Roseboom prepare dinner at their Fairfax home.

Salgu Wissmath/chronicle/chronicle

ARM was launched in the early 1980s when mortgage rates were in the teens. It is often found in high-cost areas. The metropolitan areas where ARM accounted for the largest share of traditional mortgage originations from January through August were San Jose, Bridgeport, Connecticut, and San Francisco.
core logic.
But they are not for everyone.

Important to know if you are considering ARM.
how they work.

The ARM interest rate consists of two parts. An index that changes over time and a percentage or “margin” that is fixed for the life of the loan.

Many ARMs today are
Secured Overnight Loan Rate
Interbank offer rates in London have changed following the LIBOR scandal.

Let’s say you take a 5/6 month ARM that is tied to SOFR with a margin of 2.25% and SOFR is 3%. The “fully indexed” rate is the index at the time the loan was taken plus the margin, or 5.25%.

The starting rate that is fixed for 5 years is the “note rate”. It can be higher or lower than the fully indexed rate. At 5 years, rates and payments are adjusted up or down to his SOFR for the day plus his 2.5%.

ARM is generally subject to three rate adjustment caps. For example, a cap of 2/1/5 means that the interest rate cannot be changed by more than 2% in the first adjustment period, then by 1% on each subsequent adjustment, and by 5% over the life of the loan. I can not do it. The interest rate usually does not fall below the margin. In this example it is 2.5%.

These details are
“Loan Quote”
Borrowers receive it when they apply for a mortgage.

– Kathleen Pender

Victor Galvez and his wife opted for a 30-year fixed-rate loan when they sold their home on the Edge of Sunset and bought their home in Long Beach. “I wasn’t too excited about variable rates on mortgages. I want more continuity,” he said. Moreover, when interest rates were pegged at his 4.65% in mid-August, the adjustable rate didn’t look too low. By the time he closed his Long Beach home in September, fixed rates had risen by 1 percent.

ARMs typically have lower interest rates than fixed-rate mortgages, resulting in lower initial payments. How low changes frequently and depends on the type of mortgage.

As of Friday, the average interest rate on 30-year fixed-rate eligible loans was 7.32% versus 6.75% for the 5/1 ARM, a difference of 0.6 percentage points, according to trade publications.
mortgage news dailyBoth rates were around 3% at the end of December.

Some people choose ARM because they think interest rates are going down and they can refinance to a fixed rate loan before the first rate adjustment or they plan to sell their home. Meanwhile, they can enjoy lower payouts.

In the past, some people chose ARMs because they could borrow more than fixed rate loans. This helped support home sales and prices when interest rates rose. However, this is not necessarily the case today as some ARM certifications are becoming more difficult to obtain. Mortgage Bankers Association Deputy Chief Economist Joel Kang said:

Nearly 12.8% of all mortgage applications were for ARMs as of last week, according to the association. Although this is up from 3% at the beginning of the year, the current share is well below levels reached in late 1994, early 2000, and mid-2004 to mid-2005, with ARM making up the majority of all applications. It was more than a third of his size.

According to separate data from BlackKnight, ARMs accounted for 40% of loan originations and 50% by value in 2004-05. But today’s ARMs are a stark contrast to what they were selling during the maniac era leading up to the 2008 mortgage meltdown.

Donna Weber and Ed Roseboom snuggle up on the couch at their Fairfax home.

Donna Weber and Ed Roseboom snuggle up on the couch at their Fairfax home.

Salgu Wissmath/chronicle/chronicle

In that era, ARM was often offered at an introductory or “teaser” rate that lasted only a year or two before tuning. Lenders can qualify borrowers based on these initial interest rates. Many ARMs of this era were issued to borrowers with subprime credit scores and required little or no down payment or proof of income and assets. Many offered the option to pay interest only over years and in some cases not even pay the full amount of the principal. These loans were pooled and sold to investors. When it started defaulting soon after its formation, it set off a ripple effect that collapsed the financial system.

Since then the rules have changed. The Dodd-Frank Act requires lenders to make “good faith efforts” to ensure that all borrowers own.
ability to repayThis rule applies to virtually all loans, whether fixed or adjustable, conforming (meaning guaranteed by Fannie Mae or Freddie Mac) or non-conforming (including: .
jumbo loanmore than $970,800 in most Bayer counties).

If the lender
qualifying mortgageIt is presumed that they followed this rule.Eligible mortgages include interest-only payments, negative amortization (where unpaid principal is added to the loan balance), terms over 30 years, or
a certain limitLenders must verify the borrower’s income, assets, and employment.

Lenders must also qualify as borrowers based on the highest possible interest rate and monthly payments for the first five years. As such, ARMs less than 5 years old are rarely seen.

Lenders can make loans that don’t meet the definition of a qualifying mortgage, but they can’t sell them to Fanny or Freddie, so they take on more risk. Typically, “non-qualified mortgages” such as interest-only ARMs are only made to highly qualified buyers.of
Of all mortgages, including Jumbo, it is a qualifying mortgage.

When Donna Weber and Ed Roseboom sold their Palo Alto condo and bought a house on Fairfax, their mortgage broker offered them a seven-year ARM, but “I wasn’t interested at all.” said Donna. But the loan’s starting rate was her 4.875%, which, as Donna recalled, was about 1% lower than the then-fixed rate in mid-June.

They were thrilled to bring the Fairfax home for less than the already reduced asking price. “It took five weeks. We had one offer, the majority of which was mortgage interest,” Donna said.

When the condo was sold, they were able to “refinance” the loan, leaving about half the balance. That’s one of the reasons they chose that mortgage. When recasting, you will be required to pay the principal amount in a lump sum. The lender reduces your payment, but the interest rate and term remain the same. The recast fee was only $250.

Meanwhile, Beth Phoenix secured a 5.625% interest rate on a 30-year fixed-rate loan when her offer to build a home in San Mateo with her in-laws for her daughter was accepted two weeks ago. did. She had enough savings to pay a large down payment and she didn’t need an ARM to qualify for her.

“I’m not interested in a variable rate mortgage because you never know what the mortgage rate will be, and considering I’m retiring in a few years, it just didn’t seem like a wise idea,” she said. “ARM seems to serve primarily people who are a bit younger and don’t have a big down payment but are expected to earn more. By the time rates adjust, you’ll probably have more assets.It’s kind of the opposite of my situation.”

But talking to young homebuyers about ARM is “extremely difficult,” said Michael Bellings, a realtor at San Francisco’s Compass. They’re thinking, ‘Oh my god, when fixed rates go up, we’re going to be at the mercy of the economic data.'”

Keith Gambinger, vice president of mortgage website, said young buyers “may have seen their parents or friends of their parents go into ARM and not get along.” “It wasn’t the ARM itself that was dangerous. It was the dangerous feature stacking that blew them away.

There is another reason for the slow adoption of ARM. Fixed-rate mortgages tend to follow 10-year Treasury yields, while ARM rates follow short-term yields. Short-term yields are usually lower than long-term yields, but in recent months the 2-year Treasury has yielded higher than his 10-year. According to Gunnar Blix, director of housing market research at Black Knight, investors are not keen to buy his ARM because of this unusual situation, and lenders are not keen to buy his ARM.

That’s why ARM doesn’t offer much discounts on fixed-rate mortgages, but things are starting to change and more borrowers may adopt ARM.

Westin Miller, Branch Manager, Pinnacle Home Loans in Santa Rosa, said: However, “the price gap between ARMs and fixed-rate mortgages has widened in ARM’s favor recently. I suspect more ARMs will be developed in the coming months.”

Greg McBride, Chief Financial Analyst at, said that even with the influx to ARM, “unsustainable pricing and unqualified borrowers entering housing like we saw before the It will not be a factor in doing so,” he said.

For borrowers, Greg McBride said, ARM could make sense “where revenues are expected to accelerate rapidly over the next few years, such as when doctors and lawyers start practicing.” It is not a risk borrowers should take.”

If you can’t afford a home at the current rates and prices, “just sit on the sidelines and save a bigger down payment,” says Dean Wehley, principal at John Burns Real Estate Consulting in Sacramento. “The higher the down payment, the lower the monthly payment.”

Kathleen Pender is a freelance writer and former columnist for the San Francisco Chronicle. Email: Twitter:

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