THE ADVANTAGE
Your monthly recap of the most important
mortgage-related news, perspective, and advice
April 2023
4 minute read
Did you know that Adjustable Rate Mortgages (ARMs) accounted for 12% of all mortgage applications in the US near the end of 2022?
It’s important to strengthen relationships with members by talking candidly about ARMs—explaining when they should be considered and what precautions to think about.
Why Lenders Introduced Adjustable Rates
The interest rate for a 30-year fixed rate mortgage in October of 1981 reached 18.53%. Homebuyers were understandably reluctant to lock themselves into such high interest rates for a three-decade term.
In an effort to help people find an affordable pathway to home ownership, the government allowed lending institutions to offer the first adjustable rate mortgages.
It’s interesting to note that the first ARMs were introduced to help people who otherwise wouldn’t be able to afford a home. The risk was shared between the lender and homeowner. When rates are high, it’s more probable that the market index rate will decrease over time, causing the rate to adjust in the homeowner’s favor.
How ARMs Work
ARMs have an interest rate that can go up or down at certain points during the life of the loan, affecting your member’s monthly mortgage payment. The initial rate stays the same for anywhere between 3-10 years, depending on the program. After that, the rate adjusts on regular intervals, usually every one, three, or five years.
ARMs are usually referenced with two numbers, the first indicating the initial number of years when the rate won’t change, and the second being how often the rate is allowed to change. These changes to the interest rate depend on the index the lender uses for the specific ARM program and how much margin they add to it. An example of an index would be the prime rate set by the Federal Reserve. Caps limit how much the rate can change at each adjustment and over the life of the loan.
When Your Members Should Consider an ARM
The primary advantage of an ARM is that it typically has a lower initial interest rate compared to a fixed-rate mortgage. This can make the monthly payments more affordable in the early years of the loan before the rate adjusts.
An ARM may be a good option for borrowers who plan to own their home for a relatively short period of time, such as five years or less. This is because the lower initial interest rate saves money in the short-term, even if the interest rate eventually increases.
It’s also worth noting that some borrowers plan to refinance their ARM to get a more favorable fixed-rate from a conventional loan if rates go down in the future.
Emphasize the Strength of Your Relationship
The old adage “buyer beware” still echoes in the minds of many homebuyers. Be sure to remind members that your commitment to their long-term financial wellbeing is firmly fixed, and your credit union exists to serve its members—not profit off them.
Credit unions should have a candid conversation about ARMs, to help the homebuyer determine if they’re the right mortgage product for their needs. Lenders should ask:
- How long will you stay in your home?
- Is there a chance you’ll pay your mortgage off early?
- Are you comfortable with a fluctuating payment?
The answers to these questions will help guide discussions about the potential benefits of an adjustable rate mortgage.
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Who Is MAM?
Member Advantage Mortgage (MAM) is a Credit Union Service Organization (CUSO) that helps credit unions increase revenue by offering mortgage solutions to their members.
We achieve this by finding the mortgage solution that is in each individual member’s best financial interest.
What We Do
Since 2006, MAM has offered first and second mortgage origination and fulfillment services to credit unions. We also provide marketing tools (like our Mortgage Payment Calculator) to increase lead generation.
How We Can Help You
We’ll help you improve member satisfaction and deepen member relationships by offering or streamlining your mortgage delivery process. You’ll be able to serve current members so they don’t need to turn to the competition, all while increasing your mortgage revenue and generating non-interest income.
How You Can Learn More
This page goes into greater detail on exactly how we provide support and partner with credit unions.
You can also call Del Smith, our Senior VP of Business Development, to get answers to any questions about partnering with MAM.
Disclaimer:
This information is solely for credit union and mortgage professionals and should not be distributed or provided to consumers or the general public.
Member Advantage Mortgage LLC (MAM) is a subsidiary of CUSO Development Company (CDC), which is owned and operated by credit unions for the benefit of credit unions and their members. Member Advantage Mortgage, LLC NMLS #1557. Visit www.nmlsconsumeraccess.org for complete licensing information.