Below you will find a great article written by Paul Gajdos, Regional Manager, Business Development,Residential Mortgages, CMLS. CMLS is a very important lender in our Broker channel.
A few months ago we asked: What is the best option for your clients mortgage financing? Is it a 5 year Fixed Rate? or perhaps a 5 year ARM? The answer of course varied widely depending on your view of interest rate volatility over the next 5 years. What if we only looked at the next 12 months however? Do you think that Fixed Rate mortgages will stay low? Do you think the ARM rates will rise once and hold steady for the next year?
If you think rates will remain relatively stable for the next 12 months why not use an ARM mortgage as a vehicle to reduce your applicants overall borrowing costs?
What we mean..
Look at offering the ARM as a 12 month product with a conversion after one year. Your client will save money over the next 12 months. If we are in a stable rate environment they could lock into a similar rate as of today and accelerate their repayment.
The below is an example of how this will look after one year;
| Details | 5 Year Fixed, 25 Year AM | 5 Year Adjustable Rate Term |
| Mortgage Amount | $300,000 | $300,000 |
| Interest Rate | 3.14% | P-0.75% (or 2.45%) |
| Monthly Payment | $1,441.37 | $1,441.37 (SET PAYMENT) |
| Amortization | 300 months |
|
| Balance at End of 12 Months | $291,948.04 | $289,941.11 |
| Principal Reduction |
| $2,006.93 |
Additional Principal Paid Down: $2,006.93
So what happens when they lock in or convert? With CMLS Financial we have the ability to lock into a term that is equal or greater to their remaining term. Based on the above example the client could lock into a 4 year term or greater (currently this rate would be 2.99%).
The consensus is that rates are likely to rise again slightly in the next 12 months. However, with the accelerated repayment the client will have a built in cushion insulating them from future rate increases ad payment shocks. In the above scenario the 4 year rate would need to rise to above 3.19% before the client would experience a slight increase in their monthly payment.