Adjustable Rate Mortgages Explained

Mortgage Patriot Nation Unite. In this short but detailed video, I'm going to be outlining for you a strategy of using adjustable rate mortgages or what we call ARMS for the first time in like 8 to 10 years. In other words, this strategy has not been advisable at all for a very long time for virtually a decade. But in the middle of 2025, where we are now, the ARM product is back and it makes sense on two different levels. I'm going to show you through this video how you can qualify for more home than you would otherwise with a fixed product or consequently save money as a monthly mortgage payment over a 30-year fixed mortgage. So, basically, we're going to go why do ARMS work? Now, that's the purpose of this whole video. I'm hoping you're going to enjoy it. Stick all the way through and as always, let's kick off this rodeo right now. I'm Kevin Fagen. I'm the mortgage patriot on your side nestled here in the Hill Country above San Antonio, Texas, serving all you proud Texans and all you great folks all around the country. So again, another great one. We're going to talk about adjustable rate mortgages. And before I do though, uh can you hit the like and subscribe, please? that really helps me with the algorithms on the YouTube channel and brings up my content which I put a lot of time into as you probably know if you've already been subscribed to the channel. But again, for those who haven't, subscribe if you would. And here's a couple of the videos I've done recently. The best down payment programs in 2025, uh the best renovation type loans and why would you use them in 2025. And maybe a good video that kind of dovetales into this video is how to get the lowest possible mortgage rate in 2025. uh watch all those if you would after this video. You're welcome to call me at any time at 2110-317-6514. And I I actually answer the phone, I answer my texts, answer my emails. So, uh let's get into that content right now. The flow of this video, I'm going to cover three quick topics. The first one is why now? Why are ARMS something you'd be recommending now to me? What are the benefits as a first-time home buyer or even a second time home buyer? What does that look like? Secondly, we're going to talk about if ARMS do make sense for you, then great. uh what is an ARM? Adjustable rate mortgage. What does that even mean? So, we're going to break down what an ARM, how it works, what how it's structured. And the lastly, of course, I'll give you an example. We'll take a hypothetical purchase of a home around the $300,000 level. I know your circumstances may be different. And we'll see what that savings looks like versus a 30-year mortgage, and we'll see what the qualifying aspects look like. We'll just discuss all that. So, hopefully this will make a lot of sense as we go through it. So, why use ARMS now? Because your rates are much better. It's just that simple. and everybody all they care about is rates. They shop the heck out of rates and there's nothing wrong with that. I help them do that. I've got about a 150 direct lenders that I shop my platform for very hard just to try to save an eighth of a point. Well, guess what? As of today, a five-year ARM allows you to have about a half a percent a half a percent below what a 30-year equivalent would be. So, let's take for example someone with a 680 score. Not too high, not too low. It's kind of nice nice score in the middle there. On an FHA loan, you're going to be quoted on a 30-year mortgage today about 6.25%. We're in the middle of uh 2025. On an ARM, a 5-year ARM, that same interest rate would be 5.75 in that ARM program. That's a half a percent. That's a big deal. So, why has this not happened before? Well, look on this chart here. This is about an 8-year chart of FHA rates. In the first three years on this chart, we were floating somewhere between the four and 5% range on FHA loans. Not too bad at all, but the spread between 30-year notes and ARM notes was was marginal. There was fact maybe an eighth of a point at the most. So, there was no savings virtually, in other words, to use an ARM versus a 30-year. Then, we went in the next 2-year period, we hit the historical lows when we dripped below 4% and even dipped slightly below 3% briefly there. And everybody knew this is not going to be sustainable. But during those times certainly the arms uh didn't provide any benefit either because the rates were no lower than the 30 years as well. Now we finally gone up in the last three years. We're back to a level of the you know kind of sixes to seven range. That's historically semi-aver. But the the probability of us going down is pretty good over time. And so, uh, the spread, as I've mentioned, between a a 5-year ARM and a 30-year ARM is a half a percent. That's a big deal. So, that's the main benefit is you get to lower the rate. Now, the second benefit of using ARMS is u pretty substantial as well. In the past, even if you used an ARM, you had to qualify on the basis of a 30-year mortgage. So, let's take the example like we have now. We talked about the 680 score on an FHA, and they might be quoted 6.25 25 as of today. Whereas the ARM, the 5-year ARM could get you a 5.75. So even if you use the ARM years ago, you would still have to qualify your numbers based on the higher rate of the 30-year 6.25. That is no more as of right now. If you lock on a ARM for at least a 5-year initial term, which be a 5year ARM or or greater, then you can qualify using the lower interest rate that the ARM provides. What does that do for you? Well, obviously that allows you to lower your mortgage payment as we said in the first example, first benefit, but it also you can qualify for more home. You know, you love a home, you put an offer in, and guess what? You know, you can't quite get there because your income's not quite enough. If you switch on a 30-year, if you switch to the ARM, you might be able to qualify for it because the rate is less. So, it expands your qualifying ability. Incredible benefit. So, briefly, let's just talk about how do ARMs actually work. The adjustable rate mortgage is exactly how it sounds. Adjustable rate. What does that mean? Well, and by the way, these come in all different uh loan program types. In other words, you can get ARMS for FHA, ARMS for VA, and ARMS for conventional loans, and I guess ARMS for USDA loans. Here, we're talking about the FHA ARM, but they are fixed for a certain period of time, and then they go into an adjustment period all based on a 30-year mortgage. So for example a 51 arm your rate would be fixed in our example 5.75 would be fixed for the first five years and then reset periodically once every year. So a 71 arm would be the first seven years of a fixed rate and then would reset every year after that. And then a 10-1 arm would be the first 10 years fixed and then after that would reset every year. Okay? So, the first five years you're guaranteed your rate is going to be 5.75 in our example. After that five year period it could go up or it could go down. So how does that reset work? Well, the formula is going to be embedded inside the loan documents. It's going to tell you exactly what the formula is going to be. But roughly you're going to have the index rate. And the index rate is like the 10-year treasury or the SOFR rate, and that's going to fluctuate. So the index rate goes up and down based on the market. So whatever that index rate is, let's say today it's at a certain level, and then the margin. The margin is a percentage that the lender charges that's on top of the index rate. So the index rate could change, but the margin never changes. So, let's say, for example, the margin is 1.75 and the index rate is 3%, then your fully indexed rate would be 4.75. Now, if the index goes to 4%, then your fully indexed rate would be 5.75. If the index goes to 2%, then your fully indexed rate would be 3.75. And then we always have the caps. And that's going to protect you from getting the rate reset too much. So let's say the cap is 2% per year. That means even though the index went from 3% to 4%, your rate can only go up by 2%. And that might mean 2% the first year and then 2% the second year. Or it could be 2% the first year and then 1% every year after that. It depends on the loan documents and the specific cap structure. But the point is, you are protected against runaway rates. And let me give you a quick example of that because this is important. So, let's go back to the example of the 5-year ARM on an FHA loan with a 680 score. The rate is 5.75 for the first five years. After that, let's say it resets to 6.75. That's a full percent higher. That's about $60 a month more on a $300,000 purchase. Now, that's not nothing, but it's also not the end of the world. And here's the thing, if that happens, you can always refinance into a 30-year fixed at that time. And by the way, there's another benefit of using the ARM that I haven't even talked about yet. And that is the cost. When you take out a mortgage, you pay points and fees. And on a 30-year fixed mortgage, you're going to pay typically more points and fees than on an ARM. So let's say on a 30-year FHA, you might pay 1.5 points. On a 5-year ARM, you might pay 1 point. Each point is 1% of the loan amount. So on a $300,000 loan, that's $3,000 less in closing cost on the ARM versus the 30-year fixed. That's significant savings. So you're saving money on the rate, you're saving money on the closing cost, and you can qualify for more home. Those are three pretty good reasons to consider an ARM in 2025. So, let me give you a quick example of how this all works together. Let's go back to the $300,000 example. On the 30-year fixed at 6.25%, your principal and interest payment is about $1,846 per month. On the 5-year ARM at 5.75%, your principal and interest payment is about $1,751 per month. That's about $95 less per month. Not huge, but not insignificant either. And remember, you also saved $3,000 in closing costs. So over the first five years, you're saving about $5,700 total. That's real money. And if rates come down during those five years, you can refinance into an even lower 30-year fixed. If rates go up, you're still protected by the caps. And you can always refinance out of the ARM at that point. So the bottom line is, ARMs make sense in 2025 because the spread is finally wide enough to make them attractive. For the first time in almost a decade, there's real savings available. But here's the caveat. ARMs are not for everyone. If you're planning to stay in your home for 30 years and you don't want to think about refinancing ever again, then a 30-year fixed is probably better for your peace of mind. But if you're comfortable with the idea of potentially refinancing in 5 to 7 years, and you want to save money now, then the ARM is worth serious consideration. I'm the mortgage patriot, Kevin Fagan, on your side. Make it a great one. END OF TRANSCRIPT