Mike: Arm notes, ARM notes, some people want to murder if you use the word arm note, they want to hang up the phone but let me tell you, truly, arm notes for about the last 30 years have been lower than fixed rates notes. This 30 year fixed rate notes are the interest rate on the market and so you are going to buy a 30 year interest rate you probably won’t use more than 5-6 years because you will sell the house, you will build on it, you will sell it down, you will move, you will do a cash equity, you will refinance, you will do something. Now most 30 years notes stay on the books 5.4 years in the United States so why would you pay for something for 30 years you are not going to use for 5. So there is arm notes that are like a 5, 10, 3 year arm, 5 year arm and what a 3,5,7 a 10 year arm note is a 30 year amortization normally speaking and the rate is locked for the first 5 to 7 to 10 years at a much lower rate than the 30 year rate. So arm notes are not altogether bad. Let me just say this. I purchased in the last 25 years probably, 5-6 homes, I have never done anything but an arm note, never in my lifetime, 5, 7 arm note, nor would I because I can tell you it is only worth, the lenders tell you what they are going to make upfront and I can tell you this, I bet you, I am not exaggerating a bit, $1 billion worth of loans in Dallas Texas that are under 3% and have been under 3% for 7-8 years.
Brad: So let’s talk about, what happens at the end of that arm, so you owe 3% and let’s say something happens and I am not going to sell it in 5 years…
Mike: Let’s say somebody calls me on a jumbo loan, $1 million loan; they are going to put 20% down. A 30 year jumbo today is about 4.25-4.5% depending again on credit score and the value etc. where a 10-1 arm, which is locked for 10 years, another words the rate can’t vary for 10 years, it is priced at 3.5% today so there is .75 of a point different in the rate and what happens at the end of 10 years, so that rate can’t change for 10 years and most people feel pretty confident about that. At the end of 10 years, it re-advertises, re-advertises for a 20 year period, it doesn’t re-advertise for a 30 year period, and it rolls over to what the current index in margin are and the current index in margins are all less, every single case across the border, all less than fixed rate notes today. So arm notes don’t scare me and a consumer that says well my aunt got one back in 1974 and got screwed, well in 1974, 75, 76, fixed rate notes were 16-17%, arm notes were 12% so people got that memory in their mind. It is like the 2 minute warning in football, it is a big lie. You can actually in my opinion, I would go to 7-11, get a hot dog and a gum and come back and the game is still on with a 2 minute warning. So again, as long as you understand these notes and instruments, because a lot of people think arm notes quite frankly, the rate can go up tomorrow or the next day, they are not, they are locked for certain periods of time and the longer you lock them out, the higher the rates are going to be. For example, you can get a 5-1 arm on a conforming for probably 2.5% where you are going to pay a little under 4% on a 30 year fixed. So if you are going to be transferring in and out, let’s say you are only going to be here for 3 or 4 years or you are moving (3:18) or you got your kids coming along, you are going to buy a bigger house, get a better rate or anything so you may opt to save 1.5 points on a mortgage loan and do a 30 year note that is locked for 5 years and a point better or a 1.5 point better in ranking.
Brad: And you are building equity quicker.
Mike: Well if you paid the same thing, yeah.
Brad: Make the same payment yeah. That is a Mike’s Mortgage Minute here at Reliance Mortgage.