While most purchasers of condos and co-ops prefer conventional fixed-rate financing, there is a substantial market for variable rate co-op and condo mortgages. Generally referred to as ARMs (adjustable rate mortgages), these instruments can carry a term of anywhere from 10 to 30 years with rate adjustments occurring as frequently as every year or more likely every five years or seven years.
ARMs tend to increase in popularity when mortgage rates are low and are expected to remain that way or fall further, and/or when purchase prices rise and the more competitive initial rates offered by these products facilitate purchase, particularly for buyers entering the market for the first time.
Know the Borrower, Know the Product
“As long as the borrower is comfortable with an ARM product, I would always recommend it,” says Robbie Gendels, vice president and senior loan officer at the National Cooperative Bank, a national lender for all types of co-op and condominium financing, based in Arlington, Virginia. “As long as you educate a borrower as to how the program works, what their options are, what the rate is, etc., they can make an educated decision. I would not recommend it, though, if the borrower’s comfort level with the product was not there.”
Gendels adds that sometimes a borrower may not have a choice. “For instance, the co-op or condo may not be FNMA [Fannie Mae] approved,” in which case portfolio lending is necessary. “We do portfolio lending which is adjustable rate,” says Gendels. “That’s one reason a borrower would choose an ARM product.”
Why Go For an ARM?
Quicken Loans, a major online provider of home mortgages, suggests reasons to consider an ARM as opposed to a conventional fixed-rate loan, including:
“Lowest Possible Mortgage Rate”—the rate on an ARM is flat-out lower than on a fixed-rate mortgage.
“You Don’t Plan on Staying in a Mortgage Very Long”—not everyone stays in a home for a long period, and with a shorter rate term there is likely no prepayment cost.
“You Pay Less”—lower rate means lower monthly payments. Period!
“ARMs Do Not Always Go Up”—rates may not rise substantially, so the danger of a big increase in your monthly costs is less probable than in more volatile times in the past.
A question exists as to whether individual co-op or condo boards will accept ARMs for purchase and/or refinance of units. “I have never experienced a co-op or condo not approving a purchase or refinance because of the type of mortgage the borrower is taking,” says Gendels.
That’s not to say that individual co-op and condo buildings don’t have rules regarding types of financing on an individual building basis. It’s no secret that there are buildings in New York that have many kinds of rules regarding financing including upper limits on loan-to-value or loan-to-purchase ratios as well as extensive personal financial requirements. Some properties don’t accept any unit financing at all. As Gendels says, “As you know, we (the lender) are not privy to the reasons a board may not approve a purchase or refinance.”
If you are thinking about taking an ARM, give it due consideration, but make sure you are comfortable with its pros and cons. And make sure you are aware of your building’s requirements before you take the plunge.
A.J. Sidransky is a novelist and a staff writer for The Cooperator and other publications.