File this one under PR department. Or perhaps publicity stunt.
Last week, First Savings Mortgage Corporation based out of McLean, Virginia launched a 6/1 adjustable-rate mortgage.
While this might not sound very special, it is somewhat unique in the mortgage world.
The most common types of hybrid ARMs you’ll find are the 3/1 ARM, 5/1 ARM and the 7/1 ARM, which are fixed for three, five or seven years before adjusting once each year for the remainder of the term.
So that’s basically what makes the 6/1 ARM unique – it’s not the norm. In fact, it’s right smack in the middle of the norm. And I’m not sure any other mortgage lender offers it.
Then again, I don’t know of any restaurants that serve hamburgers in hot dog buns.
Two Advantages to the 6/1 ARM
The company noted in a press release that the 6/1 ARM has two main advantages. One, it has a longer fixed rate period than the 5/1 ARM, by one year to be exact.
Hybrid ARMs like the 6/1 ARM have an initial rate that is fixed for the first six years before becoming adjustable annually, based on a variable index and a fixed margin.
Yes, instead of five years of relative safety from interest rate adjustments, you get six years.
For some, that could actually be important if mortgage rates rise by some significant amount between origination and adjustment, and the loan hasn’t been paid or refinanced.
But the reality is that ARMs have caps that minimize the amount the rate can increase, and even if a borrower were to go with a 6/1 vs. 5/1 ARM, they’d probably have plans ahead of the time to get out of the loan.
The second advantage is that First Savings Mortgage Corporation can qualify borrowers at the start rate as opposed to say the greater of the fully-indexed rate or the note rate plus two percent.
They believe qualifying at the actual note rate as opposed to having to tack on a couple percentage points will open the doors of homeownership to more folks.
And because they see the Washington D.C. area (the area they serve) as “very transient,” they believe it’s a better option than a higher cost 30-year fixed.
I’ve mentioned on occasion that homeowners don’t tend to stay in one place very long, and even if they do, there’s a good chance they’ll refinance their mortgage before maturation.
In other words, many borrowers only keep their mortgages for 5-6 years so in reality they may not even have to worry about that first rate adjustment.
Is It Cheaper?
The question you’d have to ask here is if the 6/1 ARM prices below the more commonplace 7/1 ARM. If it’s not cheaper, what’s the point?
And if it’s more expensive than a 5/1 ARM, again you have to wonder if it’s worth paying more for just one additional year of interest rate security.
The company also offers a couple more unique mortgage options, including a 5/5 ARM, which is fixed for five years and then adjustable every five years.
And a 15/15 ARM, which adjusts just once; the year 2030 based on today’s date.
Unless the rates on these unique loan products are tremendous, you’re probably better off sticking to the traditional programs because more lenders offer them, which means more competition and ideally a lower rate.