As we’ve all read and heard for the past several months, the purchase market is here to stay for the foreseeable future, so it’s our task as credit union mortgage lenders to continue to help members fulfill their dreams of homeownership no matter the market conditions. One of the best opportunities to do so is through Adjustable Rate Mortgages, or ARMs.
While ARMs were not in the discussion during the last several years due to very low interest rates, today’s purchase market has brought them back to light as a potential financing option for members. Following this year’s myCUmortgage Partner Conference, Gold Sponsor MGIC held a great ARMs refresher course, and because we recognize the importance of reintroducing ARMs to our partner credit unions, we’ve asked them to write this week’s post. In my alien opinion, this is a must read in today’s purchase market! Enjoy!
The Silver Lining for Today’s Credit Unions: Portfolio ARMs
by Chris Perry, Vice President – Credit Unions, MGIC
Supply is down and demand is up, which has created an affordability challenge for all homebuyers the last few years – particularly cash-strapped first-time homebuyers.
On top of that, Fannie Mae’s and Freddie Mac’s fixed rates have doubled in the last 6 months and are continuing their uphill climb. Yet, all is not doom and gloom. It’s actually the perfect storm for credit unions to offer an adjustable-rate mortgage (ARM) product to serve their members while increasing their loan-to-share ratio and managing their interest rate risk.
Consider this: On Oct. 5, 2022, the average 30-year fixed-rate mortgage (FRM) was 6.83%, and the average 5/1 ARM rate was 5.32%. Consider how much your members could save from using an ARM product in this example:
Loan amount: $300,000
5/1 ARM with 2/2/5 Caps
| 30-Year FRM | 5/1 ARM | Difference |
| Initial Monthly payment: | $1,961, $1,669 | $292 |
| Principal Balance Month 60 | $281,875 | $276,712, $5,163 |
The monthly payment difference of $292 represents a savings of $17,520 over 5 years. Even if, in Year 6, the rate goes up to 7.32%, bringing the new monthly payment to $2,060 for the next year, members will still have saved $16,332 by the end of Year 6. That goes a long way towards affordability! Not to mention, a 5/1 ARM allows your member to build equity faster… $5,163 more after 5 years!
Interestingly, ARM lending doesn’t have to only be about a lower interest rate in order for credit unions or their members to benefit. Credit unions can get a higher margin on ARM pricing if they base it on a product niche that members can’t get elsewhere.
For example, many lenders offer a 30-year FRM with a 90% LTV, but very few can offer an LTV above 90%. As a credit union, you could offer an ARM product with an LTV of 95% to 97% at loan amounts above Agency limits. Any increase in perceived risk could be offset by ordering standard Agency MI coverage, which will reduce your exposure to well below 80%.
In times of rising interest rates, affordability challenges and market uncertainty, your members will look to you to educate and guide them on the best product to fit their budget. Using your portfolio to help put members in homes will serve both your members and your credit union well. The obvious win for members is making homeownership possible, but the other benefits of working with you is that they save money and get help with their longer-term financial health.
For your credit union, a portfolio ARM helps you boost your loan-to-share ratio and presents an opportunity to build your members’ trust and become their financial institution for life. Chances are good that your members will also come to you for their home equity loans, refinancing, credit cards, auto loans and more. It’s a win-win.
For a refresher on ARMs and how they work, watch our “CUs Pivot to ARMS in 2022: What You Need to Know” recorded webinar on Zoom. Enter passcode: H4$K$^4d
For more information, see MGIC’s ready-made portfolio solutions.
Questions? Please contact Chris Perry, Vice President – Credit Unions for MGIC at [email protected] or 703-927-7717.