Your monthly recap of the most important
mortgage-related news, perspective, and advice
Why you should be talking ARMs with your membership
6 minute read
Last month, we talked about how having a mortgage CUSO on your side enables you to offer your membership a broader range of mortgage options. If you missed it, check it out here.
Today, we’d like to discuss an option that’s gaining in popularity in the current marketplace: adjustable rate mortgages, or ARMs.
According to data published in the spring by CoreLogic, ARMs have been surging in popularity when compared to fixed-rate mortgages (FRM), especially in areas where home prices are relatively high. The share of total mortgage applications doubled for ARMs between February and May, according to the Mortgage Bankers Association.
ARM applications are up because they offer lower rates now, especially when compared to current FRMs.
But are they worth the risk?
That depends on the homebuyer. That’s why we want to help you educate your membership so you can work together to determine if an ARM is right for them.
First and foremost, it’s important to note that today’s ARMs are not the same as those offered in the pre-Great Recession era. As Archana Pradhan of CoreLogic pointed out, these are not the same low and no-documentation loans, whereas all conventional loans these days require full documentation, amortization, and credit evaluation.
Second, some of your members may be in a good position for an ARM.
Prospective homebuyers or existing homeowners with a time horizon of 10 years or less in the home are great potential candidates. In many cases, they’ll pay less interest over the first 10 years of an ARM than they would if they went with a traditional 30 year fixed rate mortgage. That’s because ARMs usually have a lower initial rate. The rate may go up in the future, but if the member sells the home or refinances for some reason ahead of that, they’ll never experience the rate adjustment.
There are a number of other reasons members may be interested in ARMs, beyond lower initial interest rates:
- Less interest on larger loan amounts
- Same 30 year repayment period as traditional FRM
- They expect rates to be lower a few years down the road
- Likely to move or refinance within 10 years
On the same token, it’s important to advise your membership of the precautions to consider with ARMs.
- The fact that interest rates are unpredictable
- Members’ finances must be able to withstand unfavorable circumstances (unable to sell their home, loss of job, unattractive rates for refinance)
- Repayment options and requirements like balloon payments and negative amortization introduce increased risk
While many members may be conditioned to avoid these kinds of loans, they may not understand the potential benefits and it’s worth educating your members, especially for those with higher net worth who could handle the risks they involve.
So far this year, Member Advantage Mortgage has helped quite a few of its credit union partners develop niche ARM products that balance the need to manage their own interest risk with the need to offer a compelling and beneficial lower rate alternative to the traditional fixed rate mortgage that so many members initially gravitate to. We hope this helps you start or continue mortgage conversations with your membership.
At Member Advantage Mortgage, it’s our goal to help your members get the most out of the homeownership goals, so let us know if there are any questions or if you’d like to explore partnership options.
Give Your Credit Union An Even Bigger Advantage
Get The Advantage delivered right to your inbox
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.
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.