- The Washington Times - Friday, July 10, 2009

This is a follow-up column to last week’s subject concerning adjustable-rate mortgages (ARMs). I pointed out that while rates on 30-year fixed mortgages have spiked in recent weeks, ARM rates have remained low. It appears that the spread between ARM rates and fixed rates is moving back to a more traditional level after years of ARM rates hovering in the same range of fixed products.

Time will tell if this will be a long-term trend. Fixed rates have actually fallen since my last column.

The premise of last week’s column was that ARMs have generally been bashed in the media and touted as dangerous products that helped cause the economic mess. In fact, ARMs can be beneficial for the right consumer. To illustrate, I described a former neighbor who decided to refinance his 30-year fixed-rate loan, currently at 5.875 percent, to a 5/1 ARM at 4.375 percent.

Why would a homeowner switch from a perfectly acceptable fixed rate of 5.875 percent to a 4.375 percent rate that can increase after the first five years?

My neighbor and his wife are scheduled to retire within five years and move to Florida. He tells me that the chance of them holding the property for more than five years is highly unlikely.

I run some numbers and discover that refinancing to the 5/1 ARM would save them $19,000 over five years. It’s a no-brainer.

Another mortgage product that has been maligned by the media is the interest-only payment feature. Since the mortgage meltdown, I have had hundreds of conversations with homeowners seeking to refinance their interest-only loans because they want to pay down principal and want to avoid becoming victims of the housing crisis.

While this is certainly a good and responsible thing, I can’t tell you how many people don’t understand that a mortgage with an interest-only payment option is just that - an option.

Before I encourage them to refinance into an amortized loan (which would result in a fee for my company), I examine their situation. If I discover that the terms of the existing loan (rate and adjustment period) matches their objectives, I remind them that they are not forced to pay only interest on the loan.

I spit out an amortization schedule that matches my client’s scenario, and it illustrates that a loan with an interest-only payment feature can be converted to an amortized loan by making principal and interest payments each month, instead of just interest payments.

Since the mortgage meltdown, rates on any type of loan with an interest-only payment feature skyrocketed. But they are starting to come back. Last week, I noticed a 7/1 ARM with an interest-only payment feature as low as 5 percent with no points. That’s a good rate.

Does this mean we’re headed back to the “easy mortgage money” days that caused this mess? I certainly don’t think so. These programs require excellent credit, full income documentation and plenty of equity - a far cry from the feeble requirements of the past.

Is it a good thing for the consumer? Sure. The price of freedom is responsibility. A 5 percent interest-only 7/1 ARM is a great product for the right person. It’s not good for those trying to buy more house than they can intrinsically afford. Today’s stricter underwriting guidelines will prevent that.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at [email protected]

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