“OK OK”, says a borrower, as they appear to finally see the benefits of utilizing an ARM loan. But…“Even
though I know I will have saved the money in cash or equity during the first five years, I still may be faced with significantly
higher payments to make. Where will I come up with the increased cash-flow to pay the higher payment of, perhaps, $500 per
month?” The answer is simple but not obvious at first. Let’s understand what would make rates skyrocket for 8,
9, or 10 years. The overall economy would have to be very strong, almost too strong, to see inflationary pressures causing
rates to ascend and remain very high. Much of those inflationary pressures would come from employment wages rising at a torrid
pace…perhaps 10% per year or more. But let’s assume the borrower is on the very low end of pay increases, and
only sees an average increase of 4% each year. If their household income were $80,000 today and they were concerned about
the possibility of a $500 inc rease in monthly payment 9 years from now, it sure would appear scary against today’s
income. But they really need to consider what their future income will be. Even at a very modest 4% annual gain, which could
be less than half the average annual gain in a hot economic climate, their $80,000 annual income will swell to almost $110,000
in 9 years. That means they would have an extra $2,500 each month to help pay the additional $500 possible bump in their monthly
payment. Sound far-fetched? An easy way for your clients to relate to the increase in their future income is to work backwards.
This same formula would mean that their income 9 years ago was $58,000…Not very hard to believe.
Void Where Prohibited, May Cause Drowsiness and Your Mileage May Vary
Almost all of the above examples were given under the worst-case scenario for the ARM loan. And the worst-case is not
likely to occur. Even so, the results appear quite favorable when compared to the fixed. But, that said, the wide variety
of ARM loan types and their specific features require that each loan option be examined individually…thus, the above
disclaimer. But the key is for borrowers to have an open mind and explore the many options. Even a great rate on the wrong
mortgage selection can be far more costly than a fair rate on the right mortgage product to fit the individuals’ needs.
Remember…it’s not getting what you want that counts…it’s wanting what you get.