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Ask The Expert: How Are Credit Unions Offering Great Rates On Adjustables?

Lisa from Texas asked: "With higher rates, more of my customers have been asking about ARMs. Only my company’s ARM prices don’t seem to be that great a deal compared to fixed-rate mortgages. Yet there are credit unions offering great rates on adjustables. How can that be?" 

HershmanIt is not unusual for consumers to turn to ARM’s when fixed rates move higher. This move makes sense because those consumers save money in the short-run. Also, because rates are higher now, they are more likely to refinance in the not so distant future. On the other hand, if there is not significant savings by switching to an adjustable, the move may not be worth it.

Why are ARM rates so high for many sources? As the Fed is pushing short-term rates higher, longer-term rates may not move up as quickly because the markets see The Fed being aggressive against inflation. We basically have a yield-curve that is becoming more inverted over time. Not that long ago, I noted that the three-year “T” was at 4.44% and the 10-year “T” was at 3.97%.

With this lack of spread, it is no wonder that ARM pricing is not discounted much as compared to fixed-rate pricing. The next question to address is: why do many banks and credit unions have ARM rates that are discounted as compared to correspondent lenders?

Correspondent lenders are selling these loans into the secondary market. Some banks and credit unions may portfolio these loans. Keeping ARM’s on the books is less risky than placing 30-year fixed rate loans into their portfolio.

In a portfolio, the bank may be matching the returns on these ARMs to their cost of funds to acquire savings accounts. As you know, the rates paid to savers today are very low. You might also ask why some correspondent lenders have these loan rates as well? Many of them are actually delivering these as whole loans to banks or credit unions.

One other point: today many applicants are paying points to buy the rate down. Keep in mind that ARM rates present cheaper buydown opportunities as opposed to fixed rates. One point on a fixed rate loan may give you a buydown of .25%, but the same point on a 5/1 ARM could achieve a buydown of .50% or more. 

Dave Hershman is Senior VP of Sales of Weichert Financial and the top author in the mortgage industry. Dave has published seven books, as well as hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School – the online choice for expert mortgage learning and marketing content. His site is www.OriginationPro.com and he can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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