April 9th, 2015 2:34 PM by Eric Fang
Time flies and I have borrowers started refinance 5/1 ARM after their initial loan rate they locked in 2012-2013. I had one borrower who have 2.375% for 5/1 ARM in 2012, and there is only one year left for the 5 year fixed term, and he started to refi as 7/1 ARM again for the 2.75% for 7/1 ARM.
He was lucky to get that rate. And it went up 2.875% recently and it was pretty good even for this 2.875% rate.
A few days ago, one client called me about whether he should take 5/1 ARM 2.75% rate for 650k loan or 3.75% to 3.875% 30 year fixed rate. I shared with him about the following:
1)The economy cycle shortened to 6-7 years. So every 6-7 years, Fed will increase the interest rate, and then lower the rate again. So normally 7/1 ARM is good enough.
2)Even though it's a 5 year program, borrower will not lose much since he will save around 5% interests(1% each year for 5 years), it will be equivalent to 7 years even though for 5/1 ARM.
3)If the rate is much higher, the economy should be hot, and the borrower's income, bonus, stock gains, stock options will be much higher than the monthly interest increase. And the property value will be much higher as well.
4)And the most important thing, a lot of economics are concerned about the deflation, not inflation. Even if the Fed increase the interest rate, it will be only a little bit higher.