WHEN TO USE ARMS VS. FIXED RATE
With rates going in the tank ARM’s will become a topic of discussion with certain borrowers who have expectations of lower rates.
But, if you are going to use an ARM product then you need to know when to use them.
You see ARM’s are traded and sold the same as fixed MBS so they all have sweet spots of where you want to use them.
For example, yesterday if you were to price out a conventional purchase at 95% LTV with a 720 score and you want to go lender paid or zero origination say at 250 bps so pricing a loan at 102.50. If you were to price that same loan on a 5 year arm pricing would be different by about .375% in rate give or take and you would not even been able to make 250 bps. You would have about a 130 BPS discount. Arms do not like to pay as much as fixed rates.
On the 7 and 10 year arm rates may be better by about .125% in rate and again would require some discount.
Now take that same loan and you charge the borrower an origination fee of 2.5% or whatever you are required to and price it at par.
On a 5 year ARM your rate will be about .625% better in rate and if they were to pay an extra point in discount you would be a full 1% better in rate.
Then even better the 7 year ARM is close to the 5 year and the 10 year ARM is about .500% better in rate.
So, the trick to ARMs is to charge origination fees vs putting in the rate. ARMs are great on borrower paid or origination free loans.
As far as government loans go you are typically better off on the Fixed. Not a lot of great government ARMs out there.
Another option is to look at FHA loan vs Conventional loan if they both have MI you may be better off FHA.
Bottom line is to know your options……….