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Are Adjustable Rate Mortgages too Risky?

Are Adjustable Rate Mortgages Too Risky?

In our Expert Discussion this week, we are joined by Josh Lewis, Benson Pang, Paul Carson, and Scott Schang as we talk about Adjustable Rate Mortgages as a Mortgage Savings Strategy in a rising rate environment.

Josh Lewis: Welcome back everyone to find my way home live, where we get, uh, together here. Uh, mostly every Thursday, sometimes, um, Scott gets busy and he’s touring the world and doesn’t have time for us, but most weeks we’re here. We have, uh, some of our guests from the find my way home expert network. Today, we’ve got Benson Pang who is, uh, like myself here in California.

Josh Lewis: And. Paul Carson, who is on the other side of the country in Philadelphia, Pennsylvania, and Scott is in the bottom middle of the country in Austin. So today we are going to be talking about adjustable rate mortgages. As rates have risen throughout this year. It’s a topic that comes up. Um, they’re greatly misunderstood.

Josh Lewis: Probably the biggest thing I get from people is, oh, aren’t those terrible shouldn’t we avoid them. So we’re gonna go into exactly what they are. Uh, who should consider them, who should not, um, why they’re not evil, um, when to use ’em and how to use ’em. So, uh, with that, why don’t we just jump into, um, what is an adjustable rate mortgage it’s it’s fairly straightforward.

Josh Lewis: Unlike a fixed rate mortgage that has a 10, 15, 20, 30 year repayment period with a fixed interest rate, you have an adjustable rate. Um, that’s going to. Based on a schedule, an index and a margin. So you’re probably asking what are those things, Paul, why don’t you walk us through, if I’m interested, I’m a bar and I go, Hey, um, I would like an adjustable rate.

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Josh Lewis: Um, what is this index thing that I’m talking about? How do you explain that to a client who’s considering adjustable rate mortgage? Or,

Paul Carson: uh, I thought I knew arms pretty well now, but now with the change in index, it’s a pretty big topic change. So, um, the index is, is what the adjustable rate mortgage is tied to.

Paul Carson: Um, in years past that has been what’s called li but they’re phasing out li and now it’s shifting over to, I believe it’s so FFR.

Josh Lewis: Correct. Yep. Yep. So what, what that is, and what’s important about this is it’s adjustable rate mortgage, but it doesn’t mean the lender just gets to make up whatever number they want.

Josh Lewis: Your loan documents are going to spell out exactly how this works. So the index is one portion of that and that. Um, sofa index is basically, it’s a published rate of the cost of funds. And with certain types of loans, you know, Scott, you were talking about home equity lines of credit, a home equity line of credit is also a variable mortgage and that’s tied to prime rate.

Josh Lewis: So the important part is it’s a published number that you and the lender are agreeing to. To adjust that rate on that schedule. And they’re gonna look up the number, the index they’re gonna see on the adjustment date. What is the index? And we’re gonna add a number to it. Um, Benson, you wanna walk us through what the margin is and, and how that generally works.

Josh Lewis: Benson. We, we lost you. We, we lost your mic there. You muted us. You didn’t, you didn’t wanna talk with us.

Benson Pang: Oh, I’m right here. So, um, what margin is, is, uh, basically it is a, an in a percentage that’s being added to the index and create an. Rate that you’re basically making payment on. And, uh, this margin, a lot of people think of it as a risk of borrowing money and it can adjust according to your personal situation.

Benson Pang: So let’s say if you have, you’re doing 10% down versus 50% down that margin can change vastly. Uh, just like if you have a low credit score and a high credit score, that margin can also change.

Josh Lewis: So, yeah, there, there’s a number of factors that can go into that, but let’s, let’s just look in, in simple terms. So, um, those aren’t the only indexes we had, we had talked about those probably being the two most common right now. Are you guys seeing anything other than sofa for your first mortgages and prime for your second mortgages?

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Josh Lewis: Any other indexes that you guys are seeing, um, offered, uh, from, from lenders?

Paul Carson: It. It’s not often I see anything except the, the, the normal stuff. Yeah. As Li’s been phase out, but I,

Benson Pang: yep. Actually, uh, I think I’ve seen, I’ve been seeing the COFI the C O F I index that it’s. Replacing it’s the

Josh Lewis: old 11th district cost of funds.

Josh Lewis: That was, um, so what we’ll get to option arms in a minute, but that was one of the most common indexes for, uh, adjustable rate mortgages, um, back in the day for option arms. So let’s take a look at what this looks like. Now we have a fully index rate. What that means is we have your index. So let’s just go with the, the sofa index for now, plus the margin.

Josh Lewis: And that says on the adjustment. Those two numbers combined is gonna give you your fully index rate. And that is what you adjust to. So just using an example here, we have a lender that offers a 2.75 margin on a sofa index loan, which as of today is at 1.09. So the fully index rate would be 3.8, 4%. So the funny part is on a seven six arm, so that that’s fixed for seven years.

Josh Lewis: That rate today is probably in the four, four and a quarter range. But if you were to adjust today, that fully index rate you would adjust down. So it it’s funny. That’s most of the stuff that I’m seeing with sofa, that’s what it looks like. So now that you kind of understand. How your interest rate looks like I, I probably should have thrown another banner up here.

Josh Lewis: That’s the fully indexed rate, but kind of what I just was through out there was the start rate. So there is a start rate for your loan that, uh, will be on the note. So we just mentioned in a seven, six arm, you’re probably in the, you know, I shouldn’t say probably because he’s very, uh, like Benson said with credit scores, lender type of loan program, loan size.

Josh Lewis: This program I’m looking at is only for jumbo loans. Very well qualified borrowers with jumbo loans. And they’re at about four and a quarter right now. So that’s the note rate. So for the fixed period, for the seven years, you’re going to pay that at the end of the seven years. Um, Seven year fixed seven, six means it’s gonna adjust every six months.

Josh Lewis: So that’s your adjustment period. So if we were hitting seven years, the 84th payment today on the 85th, we be going to 3.84 on that. So that’s your note rate? What you pay on that’s the fully index rate, what it adjusts to, why don’t we talk about one of the really important things with, uh, adjustable rate mortgages is the, the qualifying.

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Josh Lewis: The qualifying rate you may ask, well, what do you mean? My note rate is what I’m paying on. Shouldn’t I also be qualifying off of that. Um, why don’t, uh, you, you guys walk us through this, um, Paul, what happens if we have a fixed period of 60 months or less in terms of qualifying and this isn’t consistent from every type of loan, but it, it, it’s pretty common to, to go through it the way that Paul’s gonna talk about.

Paul Carson: Yeah. Most oftentimes when you’re looking to get a, let’s say a five year fixed or a five, one arm or a five or three, one arm, I guess nowadays we’re calling them five, six and three six, which is bizarre. I have to get like, it completely changes the lingo

Josh Lewis: doesn’t flow off the tongue nearly as easily.

Paul Carson: it really doesn’t.

Paul Carson: Uh, but with a five, six or a three, a five or a three year arm, um, you have to qualify off the existing note rate, plus the margin, you plus a 2% margin on top of that. Um, versus if you took a seven year arm, That, whatever that note rate is on the seven year arm, that is what you qualify based on, um, the note rate itself.

Paul Carson: But if anything, five years or less, you have to qualify on a, a margin of additional 2% on the note rate, just to make sure you can handle that payment shock when it will adjust.

Josh Lewis: And that last thing that you said is. Go ahead, Scott.

Scott Schang: Yeah, real quick. I wanted to interject because you guys are really you’re, you’re unpacking in your dissecting arms.

Scott Schang: I, I really wanna simplify this for consumers that might be watching this, that have no idea what we’re talking about. Adjustable rate mortgages. Don’t constantly adjust. They, they, we typically call ’em hybrid because they’re fixed for a period of time. And that’s what you’re hearing. These guys say 3, 5, 7, and 10.

Scott Schang: And then the second line is how often they adjust once the fixed period is, is, is up. Is that, is, is that accurate?

Josh Lewis: Absolutely. So, and it it’s really only gonna be a one or a six one as Paul was saying means it adjusts annually. And that six is gonna adjust every six months. And for whatever reason, like, like Paul said 10 years ago, the, the one year adjustment was common and now.

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Josh Lewis: The majority of them are adjusting every six months, probably just a little more advantageous to the lender to get to BU bump it to market. Um, but I guess only advantageous when it’s going up. If the market comes down, it’s advantageous to the borrower, right.

Scott Schang: Yeah. And, and, and I would also say that most arms, most people are taking arms because they know something is going to happen within the next period of time that maybe they’re okay.

Scott Schang: Taking the risk of it. Adjusting. Most people don’t take an arm assuming that they’re gonna write it through the adjustment period.

Josh Lewis: Hold on. Hold on for a second. Before we start going before, let, let’s just close out how they work before we get into why, why would anyone want, why would I want an adjustable rate?

Josh Lewis: I want a fixed rate. I don’t, this is crazy. You guys are, these guys are talking crazy stuff over here. So kind of just to close out the thought, we talked about how they work, how they adjust that qualifying rate. What’s the logic. If I’m a borrower, I’m sitting at home going qualifying rate, adding 2%. Why in the world would you do that?

Josh Lewis: So Benson with a, with a three year, a five year or something fixed for 60 months or less, why what’s the logic of making me qualify the higher interest rate. So as a

Benson Pang: lender, um, we want to make sure that if the rate starts changing on you as the borrower, we. To make sure you still qualify. You still have the ability to repay the loan.

Benson Pang: So giving you a lower rate at three year fix or five year fix, that’s going to come real soon. Right? So we want to make sure that, Hey, if we stress test this, make sure if you add that 2%, you’re still going to qualify for that.

Josh Lewis: Yep. And, and that’s exactly what it was back in the day, you know, before the housing crisis of 2007, 2008, they would give you a three year arm or a two year arm, which comes really fast, even faster than a three year and qualify you at the start rate.

Josh Lewis: And it, they, those weren’t as a teaser rate start rate. Um, and, and they cause problems. So. Post financial crisis, the consumer financial protection bureau, the FHFA came back and said, you, if you’re going to have a loan fixed for 60 months or less, you have to have, um, an additional qualifying number that makes sure if the rate goes even higher than what is expected, that that borrower will qualify and, and be okay.

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Josh Lewis: With that kind of transitioning the conversation to where Scott was going. Um, one of the things, when you bring up adjustable rates that we hear often is wait, that’s crazy. Why are you, why would you say the word adjustable rate mortgage didn’t adjustable rate mortgages. Cause the financial crisis, didn’t it cause the housing bust, uh, of the mid two thousands.

Josh Lewis: So when someone says that to you guys, Benson Paul, what, how do you respond?

Paul Carson: Bad adjustable rate mortgages combined with many other factors that caused the housing crisis. So, um,

Josh Lewis: adjustable. So what, so what, so what makes a bad, bad adjustable rate mortgage we’re we’re talking about them, but what, what were some of the elements of the loans that were available 15 years ago that were bad that we don’t have now?

Paul Carson: I got a St. I, my start in this business was early 2008. As everything was unwinding, subprime had basically closed up shop. Uh, things were falling apart. And so I never really saw these products firsthand go through the, the, I only heard about the, kind of the nightmare stories after the fact, um, A lot of these subprime loans were very low FICOs, very questionable credit decisions and more qualified, really not even qualified at all with light documentation, very low.

Paul Carson: If any, these types of loans shouldn’t have been made in the first place. And that was the fundamental part of that. Um, I mean, we could I, I read on this topic. I could go on for

Josh Lewis: hours. Here’s the fun part. I, I started doing this stuff in 1995, um, and those loans existed the 2 28, 3 27. They were available, but they weren’t common.

Josh Lewis: And they got super common by 2005, 2006. And that was the problem. So that teaser rate, there’s actually two things primarily that made those bad loans. If you’re taking a loan, that’s only fixed for two years or three years, basically you need appreciation. Unless it’s a, a refinance and you’re a low loan to value.

Josh Lewis: You’re gonna have to refinance that loan. So when we talked about the index and the margin, the index was what it was, but these subprime loans that were only fixed for two or three years had really big margins. So you would have a start rate that was little. And a fully indexed rate. That was huge. So it’s a time bomb.

Josh Lewis: You don’t have the option of just going well now I have a, a variable rate that’s gonna adjust every six months or a year. It’s going to like double or triple your payment. So they were sold saying, eh, market’s hot. You’re gonna have more equity in two years. We’ll just refinance it. And people would just do this over and over and over again.

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Josh Lewis: Equity gets stripped. It’s musical chairs. When home values stopped going up, all of those people were unable to refinance, so we don’t really. Arms available for, for borrowers or, or less well qualified, there’s some non QM stuff. Um, but the loans adjustable rates are given to better qualified borrowers.

Josh Lewis: If it’s fixed for less than 60 months, they’re qualified at a much higher rate than the start rate. And they have to show their ability to repay the other type of really bad adjustable rate mortgage. It is no longer with us is the option arm. So it was, it was different and it was sold to generally a higher credit score borrower.

Josh Lewis: That didn’t require you to even make an interest only payment. So it was adjustable, but the bad part of it was you could make a payment that didn’t even pay the interest. So your loan was growing every month. So you can start seeing those two types of loans were a big element that they cause the housing crisis.

Josh Lewis: No, they did not. Um, were they a part of causing it and did they make it much worse? They absolutely did. So the loans that we’re talking about today, Very different. They’re fixed for a longer period of time. They have smaller margins. You’re having to make sure that you actually qualify and qualify at, uh, not just a fully index, but fully index plus if it’s fixed for a, a shorter timeframe.

Josh Lewis: So those are important things. Now, Scott, let’s get back to where, where you wanted to go with this. Consumers is great. Now I know how adjustable rates work. Why. Why would you take an adjustable rate versus a, a, a fixed rate mortgage Benson? Have if you done many recently, have you had a client take an adjustable rate and what, what are they looking at?

Josh Lewis: What benefit are they getting from adjustable versus a fixed? Yeah,

Benson Pang: definitely. Um, in fact, I was actually, we, we actually have been doing a lot of arm loans and, and, uh, I was talking to a, a sales manager. At a new build at a builder office, and we’re talking about interest rate hike and how a lot of clients stop qualifying because they are stick, they’re sticking with a 30 year fix.

Benson Pang: Right. And I’m like, why don’t you, uh, turn ’em into arm loans, you know, have ’em take an adjustable rate mortgage and see if they qualify be. So I think the strategy going forward is let’s say if you are a borrow, you’re trying to buy a. A new build and six months ago you could have qualified, but now you don’t because the rates have gone up.

Benson Pang: So I think it is definitely a great option to look into a arm loan, to see if you can still qualify. So you can continue to buy this house.

Josh Lewis: So I, if you’re looking at the longer timeframe, so a seven or a 10, and you can qualify at that start rate and the start rate is lower, then obviously it’s gonna help the, the debt to income ratio there, which, um, are, are all loans being offered with adjustable rates or is it specific loans targeted as just two specific borrowers who can benefit from this?

Benson Pang: Yeah. So typically we’re talking about jumbo loans, right? Uh, conventional loan conforming, meaning if your loan balance is not that high. Regular buyer. I think the 30 year fix is probably going to be a better option and another, uh, type of people, borrowers that are getting an arm loan is we’re talking about bank statement loan, the, these non QM alternative document loans.

Benson Pang: Um, and they’re usually going on the, the, the arm loans. So bank statement, DSCR investor loans. Those are usually the arm loan candidates.

Josh Lewis: And, and Paul, are you seeing the same thing for, for your Fannie Mae Freddie Mac loans that are, that are going to a borrower buying at your conforming loan limits? Um, are they able to benefit from these adjustable.

Paul Carson: We’re starting to have a lot more conversations with folks who are just wanna see, is it even worthwhile to take a look and, um, what’s the interest rate spread? So if a 30 year fixed is let’s say it was not to quote rates, but usually it’s like going from a 30 year fixed to a 10, one to a seven and a five.

Paul Carson: You start going down in eighth, eighth to a quarter sometimes between the product. So if you can save. Depending on it’s arms, from what we’re seeing. It’s like, they make more sense on larger loans because you can save more each eighth of a rate cuz that’s, that’s how it works. So, um, usually we’ll see it with more seasoned homeowners.

Paul Carson: Who’ve. Owned a home before have, have, uh, plenty of reserves. Um, good with managing cash flow, things like that. It’s we rare, rarely receive somebody who is a first time home buyer who wants an adjustable rate mortgage. That’s ver that’s very rare. Uh, if at all, Um, but oftentimes clients know, Hey, I, I should be able to save a decent amount on interest rate and get that down from a 30 year fix to something.

Paul Carson: That’s, if you can save a quarter to a half percent, maybe even more depending on the product or their situation, um, it starts to add up and it makes sense, especially, you know, okay. I have five years, I have seven years to plan for what’s next. And it’s, um, planning out, you know, if the market improves within that timeframe, being ready to take advantage of an opportunity in refinancing or knowing I’m definitely gonna be moving in that time period.

Paul Carson: And I know I’m not gonna have that loan that long. So. Thinking through managing the risk as best you can, but also at the same time too. It’s a good bet on yourself to use these loans, save interests and save money.

Josh Lewis: So everyone has an opinion on interest rates and anyone that knows me knows that I have an opinion on interest rates.

Josh Lewis: They, um, what’s, what’s the full saying Scott you’re you’re the philosopher, the, the whole, the arc of history bends towards justice. What’s the whole saying I. Yeah, I digress. You guys know what I talk about? What I’m talking about. The arc of interest rates for the last 40 years has, uh, has, has gone towards lower.

Josh Lewis: So now magically, um, post COVID post, uh, Russia, invading Ukraine, many people with opinions think that that rates are gonna go higher. This crazy weird 40 year period that we had with ultra low interest rates or decreasing all the way down to ultra low interest rates is gone and is behind us. Probably a topic for another episode.

Josh Lewis: I don’t believe that’s true. Um, we’ve seen Japan going on. What, since the late eighties, uh, early nineties going on 30 plus years here of ultra low interest rates. And for many of the same reasons, we’re likely to look at the same, but what we do have. Undeniably is right now, today, rates are much higher than they were six months ago, or anytime, really in the last 11, 12 years.

Josh Lewis: So this is a way to get in at a, a lower payment, um, maybe qualify for more home with home prices up higher. Um, and if, and when interest rates do normalize, even if they don’t go back down to the 2 75 or 3% where we were six months ago, if you’re looking at a five and a quarter. A 4% interest rate on a 30 year fix.

Josh Lewis: Sounds awesome. So if in the interim you can get a seven, six arm, a 10, six arm at four and three quarters, and then refinance two, three years down the line to a 4%. It’s a good strategy, a good interim move. And then with that, people always ask. Cool. What, what if rates don’t go down? So, uh, benzo, what do you, what do you tell your clients?

Josh Lewis: If they take a, a seven, six or a 10, six, and they go, what, what, what do I do if rates don’t go down and rates are higher seven to 10 years from now?

Benson Pang: Well, first of all, I think we, we haven’t touched on the cap of these arm loans, right? So we’re, we’re talking about how amazing it is. It’s a little bit lower than current.

Benson Pang: 30 year fix, but when it starts adjusting it, doesn’t just go straight to the current rate or future rate. So let’s say a future rate goes up by 5% or even higher, 6%, whatever it is, there are caps, uh, in place that is placed by. These lenders. And usually let’s say, you’ll see, you typically hear something like 2 25, right?

Benson Pang: 2 25, which means that your first year, uh, change in the, in the interest rate is not going to go up more than 2%. Um, Of your, your current note rate and then the other two, the middle one is every year after, is not going to go up another 2%. And then there’s also a cap of 5%, which is the last number. So your, your rate is going to be capped out at 5% in the entire lifetime of the loan.

Benson Pang: So going back to the question. rates. If it goes up, there’s a cap. And also during the next seven years or five years, whatever your, your rate is, uh, fixed ad, you’re already saving money for that period of time. Five, seven years. So if you have to start paying a little bit more, you think about it as well.

Benson Pang: My break even point is really not at seven years. If it’s a seven year fixed loan, right? It’s not really, at seven years, it could be at nine years or 10 years or 11 years. And I don’t know, I look back 10 years ago, what I was doing and what did, what have I achieved in the last 10 years? It’s a lot of things that I’ve done

Josh Lewis: and moving our little ground in the last 10 years.

Josh Lewis: Yeah.

Benson Pang: so much has changed. Right? People move, people, change jobs and, and. We’re not, we are unique individually, but we’re not all that unique. Right. Things happen to us. Scott moved right. So any everyone moves in the, in the next 10 years,

Scott Schang: it’s just, or you have kids or you have what,

Josh Lewis: whatever. Right. So what, what yeah.

Josh Lewis: What you guys are talking about is important. So especially for. A first time buyer. First time buyers generally move sooner than a move up. Buyer and tenure in the home has been stretching out. I think we’re about 11 years right now is how long the average homeowner lives in their home. And when I started back in the nineties, which was like 150 years ago, that.

Josh Lewis: Number was about six and a half, seven years that people would move and they would probably refinance or typically would refinance at one time in that timeframe. So when you look at that, the refinances over the last 40 years have been pretty standard at about every three and a half to five years. The market has given people an opportunity to refinance, but what has stretched out is the average tenure in the home.

Josh Lewis: So people are, are staying there longer. Now, again, less common for a first time buyer to stay in a home for a long time, but most Americans on average, 10, 11 years in that home. So again, let’s go back and say, we, the world changes and rates never go back down. You never get a chance to refinance. We’ve been there for 10 years.

Josh Lewis: You didn’t move. Um, you and your dog are watching TV in the same living room. Besides those caps. What other elements or, or things are working in a borrower’s favor that 10 years from now, it’s not likely to be problematic for them to have a higher adjustment. You, you got any thoughts on that?

Paul Carson: Yeah. Um, probably a good example is, uh, I’ve had, my wife has had an adjustable rate mortgage that she got in 2006.

Paul Carson: So it was a five one arm as it was fixed for the first five years through 2011. And it has been adjusting every year since 2011. Um, that first adjustment in 2011, the interest rate went from 5.875 down to 3.875. It dropped two full percent. I think if I recall correctly, we saved about seven twenty five a month on principal and interest.

Paul Carson: Um, at the time we had then had to move out of that condo, rent it out. We were buying a house in the suburbs. It was great timing. Um, so it actually continued to go down. Went up and down for a number of years. Um, it, most recently after the index dropped li basically plunged after COVID, it went as low as 2.875.

Paul Carson: So for an investment property to have an interest rate where you don’t even have 20% equity, I mean, I’ve been waiting to refinance this property for a long time. We’re almost getting there kind of close. Um, but it’s still been. It’s been a great product cuz that having that original fixed rate, it would’ve been 5.8, seven five for the duration of the loan, which happens to be a 40 year amateurization for another topic and another call

Josh Lewis: all the interesting stuff.

Paul Carson: Oh yeah. It’s uh, yeah, 103 LTV. Sure. Why not?

Scott Schang: Yeah. There’s there’s I have a very similar story with a client of mine and I’d like to get your guys’ opinion on this. So. As interest rates go up. Right. Well, let me save that question for the end, but I had a, I had a client back when you had more alternative, uh, documentation loans, uh, big down payment.

Scott Schang: Perfect credit score. Lots of reserves, but she was self-employed in her income was, uh, variable. So we used something that was less, uh, didn’t have to, didn’t have to document her income and it was. I think it was a 10 year arm. It was a ten one arm. And she had this loan fixed for 10 years or maybe it was seven years.

Scott Schang: And then after the crash, it adjusted and she was in panic mode and she was like, we’ve gotta refinance this thing. And I’m well, first of all, The product that we used to get you into the home doesn’t exist anymore, but here’s the good news. Your interest rate is going to go down every year for the foreseeable future.

Scott Schang: So it went just like yours, Paul. It was, but I think it was closer to six or seven back when we got the original loan and it dropped like 2% every year for the next three or four years. So. The, and, and, you know, she never, and this was a jumbo loan too. This was a Plex in LA or something like that is, is what it was.

Scott Schang: And, um, so, so here’s my question. And I’d like to get your guys’ opinion on this is as we see fixed rate mortgages go up, are we also seeing those indexes go up now? So that in the future in maybe five or seven years, if those will, what’s the probability of those indexes going back down. So even if our loan does adjust, there’s a probability of it adjusting down.

Josh Lewis: They’re, they’re definitely trending up, but they’re, they’re not. Super high. That’s why the rates on these are, are actually lower. And like I said, on the one that I showed today, if you were hitting the end of your seven years, you’d go from about four and a quarter to about 3.85. So as long as rates are the same as they are today or lower that product, which is pretty common jumbo loan product, um, would, uh, adjust lower.

Josh Lewis: And that’s, it’s a very common story. So it’s funny, Paul, I was gonna say was, you were telling. I have the exact same story. In 2003, we did a, a, a ten one arm, uh, at, at 4.375. And I. Why, why would I do anything else? There’s no world in which I’m gonna live in this home in 10 years. And what do you know here we are, 19 years later, I’m still in the same house.

Josh Lewis: And for us it was, it was fortunate. You, you have it wasn’t COVID at that time, but it was the financial crisis with quantitative easing one, two, and three. Every time that thing adjusted, we went from 4.375. To anywhere. I think the lowest it went, it was like 2.59. And the highest it went was like 3.4. And I was actually mad the year that, that, that index, it was li B O and LIBO was up that year at our adjustment.

Josh Lewis: It was the highest point in the year. Cause we adjusted in October and I was mad. I’m like, this is terrible. Why am I at 3.4%? And until COVID hit and rates went super low. We never swapped out of that loan because it stayed that, that low. So I don’t know. I don’t know that I would necessarily count on it, Scott.

Josh Lewis: Um, none of us have a crystal ball, but you guys know my thoughts. I just shared them with you. I think that that the trend for the, the near and midterm future is for rates to continue to go lower. When we get past the supply chain issues. When we get past the war issues, um, the only factor that’s changed or that will permanently change post COVID.

Josh Lewis: The we benefited from the tailwinds of globalization for the last 30, 40 years. And one of the outcomes of that was lower interest rates, lower costs for everything, but lower inflation, a disinflationary, not a deflationary, but a disinflationary environment led the lower prices and lower interest rates.

Josh Lewis: Well, We kind of saw during COVID and then definitely with the invasion of the Ukraine, the problems with these long global supply chains. So you’re seeing nearshoring friends, shoring, pulling things. I mean, no, one’s gonna go back to supply chains all within their own borders, but they’re gonna bring it closer for the us.

Josh Lewis: That means we’re gonna do more in Mexico, more in Canada with allies that are, that are close to us. That may raise costs. We have technology in our favor, which is one of the big causes of disinflation over the long haul. So things like, um, you know, uh, 3d printing where, where things can be manufactured, right?

Josh Lewis: Uh, the parts can be manufactured, right? Where things are put together means that bringing those supply chains closer to home is not nearly as expensive as it once was. So it’s a, it’s an opportunity, but long way of saying that potential, um, Inflationary factor of not having, uh, the ability to, to globalize your workforce and your production would be the only thing that, that I could see coming out of COVID that would lead to, uh, a long term trend towards higher interest rates.

Josh Lewis: All of the things. The impacts of technology, the impacts of a graying population, not just in the United States, but worldwide. All of those things tell us that we are likely to have less inflation going forward. So it’s funny. Let me transition from that to say two other things that work in your favor.

Josh Lewis: When you take a 5, 7, 10 year adjustable rate are related back to inflation, the good sides of inflation. So we’re all well aware for the last year or two, that inflation sucks. Right? We, the last month we got CPI figured 8.9%. No one wants to see that, but. For homeowners that say I had home price, uh, inflation of 20% last, last year.

Josh Lewis: They all like that a lot. That sounds good. Right. So if we go back 75, 76 years, that number nationwide in the United States has been about 4.5, 4.6%. So if we flash forward 10 years in most 10 year windows, the last 75 years, your home is worth about 50% more. So you have a tough equity in your. Which opens up some options.

Josh Lewis: If you’re going to stay there and most important. If your wage growth is 2%, 3%. You’re making 25 to 30% more at the end of that 10 year, uh, timeframe. So you make more, your home’s worth more kind of going back to what Benson said. Everything changes. Life is very different. I just, one of the stories I love to tell when I bought my first condo.

Josh Lewis: I was living at home with my dad. So I never rented. I went from living at home free to buying a condo and the payment was $1,138 a month. And about two days before we’re ready to move in. After I had signed the loan docs, I’m in a full blown panic. I’m like, how in God’s name am I gonna pay $1,138 every month.

Josh Lewis: I’ve never made a rent. Payment my entire life. And, and you laugh, cuz you’re like that’s stupid, Josh. We would all be thrilled to have an $1,138 monthly housing payment. And for most homeowners after you make 3, 4, 5 payments, you go, oh, I was just being crazy. That all makes sense. And that’s just sort of the impacts of inflation and your life changing in the ways that that Benson was talking about.

Josh Lewis: So long way of saying. I don’t think adjustable rates are the answer for everyone. They’re not even the answer for the majority of people, but it’s something you probably want to talk to your loan officer about and see if it can be helpful for you, um, in, in that process. So, you know, we’re, we’re going about 35 minutes here, but when we go, as long as you guys want, but what, what are your thoughts?

Josh Lewis: Any, any advice, any words of wisdom for potential buyers, borrowers, refinances out there in the market? So,

Scott Schang: oh, go ahead.

Benson Pang: Going, going into that wage. Right. I, uh, talked to a lot of first time home buyer, um, oh, high, high wage earner. His were in California. Right. And, but then the downside is very expensive, California homes, over $1 million in orange county for a condo that’s 1600 square foot.

Benson Pang: So. You’re going to be house poor for a couple of years. If you even, even with dual income, you’re not going to have those, uh, crazy meals that you’re you’re, you’re always, you know, every other weekend you’re going out there, whatever you’re seeing on Facebook, you probably don’t want to be doing that every week anymore.

Benson Pang: Right. But I think that’s temporary. Right? Um, raids gonna come back down. You’re going to. A chance to refinance, uh, your wage is gonna continue to go up. You’re going to reach high places, get the next promotion, get the next, whatever it is, right. Your wage is gonna continue to go up. So there isn’t a whole lot of things to worry about.

Benson Pang: So if the payment works for you today, it works for you. No question about it.

Scott Schang: The thing I wanted to interject here is, is, is really we, we talk about, I mean, if you’ve never done homework on a, if you’re a consumer, you’ve never done homework on an arm, your head is spinning right now with, with. Three ones and 10 ones and two 20 fives and indexes and margins.

Scott Schang: And the, the single most important thing is working with somebody like Paul, Josh, or Benson that can explain these things because there are no surprises with an arm loan, you know exactly what the index is, you know exactly what the margin is, you know exactly what the caps are and when they’re going to happen and you always have plenty of warning and there’s nothing.

Scott Schang: Ever locking you into that loan. If you’ve got a seven one arm or a ten one arm and 30 year interest rates in, in six years drop to below what your fixed rate is on your arm, you refinance into that 30 year fixed loan, and then you don’t even have to worry about it. But. It’s it’s, it’s having it’s, it’s being educated and being informed and working with a professional and an expert.

Scott Schang: That’s gonna treat you as though the, their family. I’m not gonna let you get into any trouble here. I want you to understand exactly what’s going on so that there are never any surprises. And, and that’s the important thing. If somebody starts slinging arms at you and. and, and isn’t breaking down the math and talking to you about exactly how they work.

Scott Schang: If all they’re doing is leading with rate, you run like hell, right? Because there, there there’s. I mean, you know, Josh, we know people in, in our space that are out there pushing six month arms. Because the interest rates are really low on Facebook ads, right? And, and there are big companies that are doing that, that they’re out there talking about mortgages in the under 3%.

Scott Schang: And those are very, very volatile products. And if, if you were, you would never give that loan to your mom. Right. you wouldn’t let it happen. So it it’s IM it’s important because arms can be. Very sexy. If you just look at the interest rate and you don’t look at the terms and don’t understand the terms, what, what we’re talking about here primarily are, are relatively safe, fixed for a long enough period of time that you’re going to have options.

Scott Schang: Sir, you’re gonna have, you’re gonna have high probability of having options before that loan ever adjusts. And it’s that balance between. Being it’s that balance between being, um, conservative and having a little bit of a, a, a tolerance for risk, right. And, and all of that, all of that is supported by, uh, education and, and, and making sure that you understand and working with somebody that.

Scott Schang: You know, you might not remember in three years, but when Josh calls you three years later and says, Hey, you know, I’ve been watching the rates. And I think there’s an opportunity for you to fix that rate. Now, you know, that’s what a professional, that’s what a mortgage professional is gonna do for you.

Paul Carson: And I, I can give you a real life example of, um,

Josh Lewis: Uh,

Paul Carson: four years ago.

Paul Carson: Yeah, January of 2018, my wife and I settled on our new construction house and we did a jumbo 80 10. We did a piggyback financing 30 and we were looking at a 30 year fix for the first, but I went and looked at a five, one jumbo arm. It ended up saving instead of having a fixed rate of, I think it was at least four and a half.

Paul Carson: We were at 3.375 on a five, one jumbo arm. And how I, how I view arms, it’s a microbe. I looked at myself and said, okay, we’re gonna save a full percent on our major part of our loan because this is, this is the loan we need to get. So there’s a big jumbo lenders when you’re pricing out subordinate financing with a second mortgage can get pretty expensive, very fast.

Paul Carson: So. Fast forward to knowing, okay, we’re gonna save this amount per month over the next five years. Whenever there’s an opportunity for me to get somewhere close to where this five one arm rate is, I’m gonna take advantage of it. So. When COVID hit, unfortunately, Jugo went away for a long time, the better part of a year.

Paul Carson: So early 20, 21, Joe Mo came back around. Um, we were able to refinance into a 30 year fix at 3.25. So we actually went down in eighth of a rate and got a 30 year fix. So I’m it eliminated the

Scott Schang: second, probably because you had equity by then.

Paul Carson: Fortunately equity. We, we got a, a bump in equity. So we were able to be, uh, over 20% equity at the time when we did the refinance, it was like 25% equity.

Paul Carson: So, um, good spot to be in.

Benson Pang: And there, I think there’s also one thing that we didn’t touch on is Paul. You kind of remind reminded everyone that, Hey, you are saving money, right. Compared to a 30 year fix. The money that you’re saving, you can actually do a lot of things with it, right? If you were to find a certified financial planner or a advisor, you can definitely put that money into really, really good use.

Benson Pang: We, I mean, stock market, whatever that is, you can get it. Get. Anything higher than what the rate is right now. You’re, you’re going to make money. And in seven years and 10 years that money’s gonna snowball into a pretty big lump sum. And that that point you can actually, if you want to pay down the mortgage, if you want to do anything with it, now you have the money to do that.

Josh Lewis: No, uh, a hundred percent, uh, uh, agreed. There’s it’s there, like the big theme. What you should take from this is they’re a tool there’s a time and a place to use them. It’s important to work with an expert and an advisor, both in the transaction, but it is not transactional. That is relational. Paul obviously managed his own mortgage through the years and through that process, but you want someone that’s gonna be doing that for you.

Josh Lewis: So for, for our part, we screen all the folks that come into the find my way home expert network, people like Benson people like Paul to make sure that they’re transactional experts, but they’re also relational experts and they’re watching their clients. Taking care for your needs. They’re not kids in the call center looking to do today’s loan.

Josh Lewis: They’re looking to be your advisor for, for life. And especially when you’re considering something important, uh, like a mortgage and an adjustable rate mortgage specifically, that can be really important. So thank both of you gentlemen, especially Paul, it’s almost, uh, what almost 9:00 PM. It’s past your bedtime in, in Philadelphia.

Scott Schang: Yeah, Paul, our idea of using natural light, uh, only worked for like the first 20 minutes.

Paul Carson: really fizzled out.

Josh Lewis: Didn’t it? It only works for people that live on the best coast, Scott. Uh, the rest of you are in trouble.

Paul Carson: yeah.

Scott Schang: Now really good conversation guys. Thanks for, uh, thanks for unpacking that, that was, uh, that that’s a really relevant conversation.

Josh Lewis: Yep. Thanks for having. All right, join us next week. We’ll go through another topic and, uh, bring you some more information, hopefully helpful in today’s housing market. All right, thanks for joining us. Bye.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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