Outlook for ARMs Is Good Going Into 2014
Normally, that might rankle homeowners who've opted for adjustable-rate mortgages. Such mortgages "open" with lower interest rates, then rise after the ARM's term expiration period. Most ARMS are packaged by mortgage lenders in one-, three-, and five-year loans.
After those loan periods expire, the mortgage interest rate and monthly payments adjust. How much the interest goes up is calculated by adding the agreed upon margin to an index such as the London Interbank Offered Rate. The size of the margin typically depends on the creditworthiness of the borrower.
Historically, those adjustable rates can ratchet upward significantly for homeowners, adding hundreds of dollars to a monthly mortgage payment.Lender Processing Services, most (63%) outstanding hybrid ARMs have already reset this year, so mortgage holders can breathe a sigh of relief knowing their mortgage rates will remain relatively low, at least for another 12 months. Of the remaining loans that have not reset, LPS says 75% of them originated in post-recession years, when most credit scores were higher and banks and lenders restricted their mortgage loans to low-risk homebuyers. Thus those borrowers aren't likely to see higher ARM rates once they reset, LPS says. "Only 36% of outstanding hybrid ARMs are in a pre-reset status, and the vast majority of those are coming from newer vintages where loan quality has been pristine," says Herb Blecher, a senior vice president at LPS. "That being the case, LPS looked closely at the remaining segment of pre-reset loans originated during the bubble years where underwriting criteria was not nearly as strict as post-crisis criteria -- since it is these borrowers who could arguably be most negatively impacted by upward resets in their monthly mortgage payments -- and sees little cause for concern."
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