You would be absolutely stupid to do an ARM in this market. With fixed interest mortgages at their lowest levels in years, and with the uncertainty of the real estate market, residents would be absolutely stupid to get an ARM.
Here's why:
Yes, they will finish residency in 3-4 years and the ARM is good for 5. However, nobody knows what the interest rates will be like in 5 years. They will likely be much, much higher. The real estate market is unlikely to return to the pre-recession days. Meaning it's going to be a lot harder to sell a house even when the recession goes away. The reason is banks are so hesitant to loan money, and people have damaged their credit scores by not keeping up with payments in a timely fashion.
The resident won't be able to sell the house after finishing residency for 6 months to several years (this is occurring right now with a few residents I trained with). This means it will be harder to buy another house where the physician plans to practice. The interest rate may jump to 11% after the ARM period finishes, which will make payments extremely expensive.
Yes, an ARM is a great idea for Compass because Compass makes money on it, but it's a bad idea for those financing. ARM's wouldn't be offered if banks didn't make loads of money off them.
We will have to agree to disagree. At the end of the residency, most will be moving to a different city, state, etc. Income will triple or more. And, based on a purchase price of $167,000, at the end of 5 years if the ARM adjusted to the max, the payment would only go up $460, not much for someone whose income increases so dramatically.
As for selling the house, doesn't that depend on the area of the country they are in? And you are assuming that the real estate market will be the same 5 years from now, which nobody can be sure about. But, in my area, real estate prices have held their value pretty well.
As for Compass making a lot of money on ARMS, we actually make less than if it was a fixed rate if the ARM rate is lower. In addition, the loan is normally paid off in 5 years or less, whereas, somebody on a fixed rate keeps the loan for a much longer period of time making the bank even MORE. Banks aren't hesitant to loan money, most especially Compass on this program, but you have to prove income and have decent credit. What's so wrong about that?
What got the industry in such bad shape was the NINA and NINJNA loans that so many lenders were pushing, plus the ARMS that were so stupid for people to do in the first place (pay option with negative amortization). A plain ARM is still a very safe loan for borrowers and lenders alike, in most cases, but I will be the first to say it depends on the individual and his/her situation. It's obvious you don't think much of ARMS, but for a lot of residents I have done loans for, it makes perfect sense to them. I try and educate them on exactly what they are doing. No arm (no pun intended) twisting and if they don't want to do it, that's fine with me.