What is an ARM and why should I care?

What is an ARM and why should I care?

This Week's Top Headlines:


Student Loan Moratorium Over = Serious Threat to Economy; What Borrowers With Student Loans Can Do 
It turns out that most of the retail economy has been running on student loan debt relief. Who knew? Unfortunately, that relief is about to end...
 
Rates Climb 1/2%! Will It Last? What’s Going On?
We are back to levels only slightly below the peaks we saw last fall. To say this is a surprise is an understatement, as much of the finance world expected...
 
The CEO of Fortune 500 homebuilder D.R. Horton reveals how he cornered the housing market amid a historic affordability squeeze
The dream of home ownership is fading due to a housing shortage and soaring mortgage rates. Yet, the CEO of D.R. Horton is cashing in on the current uncertainty, providing a roadmap for savvy investors...
 
A kind of mortgage that helped cause the 2008 housing crash is surging in popularity. Here's why it's different this time
A mortgage product that helped trigger the 2008 housing crash is becoming popular again— but this time it's different....

 

Hey gang, if you've been reading my last several newsletters you already know my thoughts on the stability of the market, and why we haven't experienced more of a correction so far.

In a few words: massive lack of inventory.


 


I recently shared where I believe the next sources of inventory will come from, and I'm continuing to keep an eye on that. As a subscriber to this newsletter, you'll be among the first to hear about it when that flood of listings comes.

In today's newsletter I wanted to touch on another similarity to the 2008 crash: ARMs.





ARM stands for Adjustable Rate Mortgages. These loans adjust based on the market, and often times come with a below market rate for a short time before going adjustable.

You might see them referred to as 3/1 or 5/1 or 7/1s. The first number is how long the rate is fixed for, before going adjustable. So the above examples would be fixed for 3 years, 5 years, and 7 years respectively.

The allure of these types of loans is to get a lower monthly payment, when traditional financing may price you out of being competitive in a seller's market.

The sales pitch that goes along with these are:
1. "rates will come down in a few years, you can just refinance then!"
2. "houses will continue to appreciate massively so if you do need to sell later you'll make a killing"
3. "you get raises every year right? it's ok if the payments go up in a few years because you'll be making more money won't you?" (I personally heard that one when I bought my first house at 19)


 


Some of these ARMs are even "interest only", which further reduces the monthly required payment. 

These can be an effective tool if you know:
1. rates will come down in a few years
2. houses will continue to appreciate
3. you have job stability with regular raises.

Unfortunately, there's no way to know for sure whether 1 or 2 will happen, and those are tied to whether 3 comes true.

The problem people got themselves into in the last crash is when unemployment spiked and people lost their jobs, number 3 didn't come true, and when a flood of those people hit the market, number 2 was significantly impacted and people ended up upside down.

Fortunately, ARMs have been fairly absent in the last decade of extremely low interest rate loans, but they began to make a comeback starting in late 2021.

Those folks are ok for the next couple of years but if rates continue to increase they will find themselves with payments based on interest rates that are more than twice what their fixed rate was.

If you're in that camp, as painful as it might be to take preventative measures, your likely best route is to stay ahead of things and sell now before you end up getting forced to sell. Luckily you may still have some equity.

The rest of folks who are sitting on ultra low interest rate loans will likely hold onto those houses with a death grip.


 


And can you blame them? Who would want to sell their house and buy a smaller house with a similar loan amount but pay nearly double in monthly payments?

"Forget all that mess, ima just stay here"
-pretty much everyone

So if you want to know "when" the market correction is going to happen, continue to keep your eyes on those three sources of potential inventory

As always, my promise to you each and every week is to act as your personal assistant and help you understand what's happening in the world of real estate.

If there's something you'd like me to include in a future newsletter, please let me know!

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