Is a five by five loan safe?
September 23, 2011 5:22 AM   Subscribe

My dream co-op financed--maybe. In my limited knowledge, the "five by five loan" sounds suspiciously like an ARM, although the lender swears it isn't. So what is it exactly?

You may remember my search for a condo, and my questions about co-ops. I went to this co-op office and within five minutes had the contact information of lender that works with co-ops, a map/layout of the units, and the names of the board of directors. (Imagine if the government ran like that!)

I've got testimonials from people (friends of friends) that already live there -- they love it.

When I called the recommended credit union, she told me the ten-year loan was a five by five and the interest re-adjusted in the fifth year. It can never go higher than some x (2%? sorry, I left my notebook in my car) on the Treasury rate, though, and is not an ARM, she said when I asked her.

I realize you're not a real estate lawyer, and I have a call into one that was recommended. While I'm waiting to hear from him, though, I'm asking of your collective wisdom (google-fu fails me).
posted by Prairie to Home & Garden (22 answers total)
She is probably referring to a "5/5 ARM", which is, obviously an ARM. They're usually notated that way- the first number is the number of years after which the rate readjusts, and the second number is the interval at which it continues to readjust. So, a 5/5 readjusts after 5 years, and will readjust after another 5 years. On a 10-year loan, obviously, this would only happen once.

Without knowing the details, it sounds like the credit union is broadly correct about the mechanics, but is lying when she says it's not an ARM. Definitely speak to an expert on this.
posted by mkultra at 5:37 AM on September 23, 2011

So, your potential lender told you that the loan is not an adjustable rate mortgage, but rather a mortgage in which the rate adjusts.

Okay. I'd be skeptical of anything the lender says.
posted by coryinabox at 5:40 AM on September 23, 2011 [4 favorites]

Well, I suppose they can say it isn't an ARM in that the interest rate doesn't re-adjust as often as a traditional ARM. It's a bit of semantics. ARMs are like poison to borrowers these days, so I can well imagine lenders coming-up with all sorts of nomenclature for their adjustable-rate products.
posted by Thorzdad at 5:41 AM on September 23, 2011

Well, it kind of is. It adjusts at some point. If you have the mechanism, you can reasonably predict what you'll be paying and if you can really afford it (assuming your income scales roughly with inflation).

The nasty trick with some ARMs was how they had a very low rate up front and a large one later. You could afford the first year payments, but were hosed later. She may be saying it's not that.

Figure out what the 6th year payments are when ten year t-bills are say 8%. Can you afford that?
posted by a robot made out of meat at 5:43 AM on September 23, 2011 [2 favorites]

Apparently this is extremely common in Canada. Here is one article that explains it.
posted by Houstonian at 5:43 AM on September 23, 2011

(8% is very high for a ten year t-bill; you can see how whatever rate you're linked to has behaved in the past here.)
posted by a robot made out of meat at 5:49 AM on September 23, 2011

What kind of loan do you want on your co-op? Ask your lender for that kind of loan.

I realize that co-ops are harder to finance and that you're probably working with whatever loan agency/bank/broker that your co-op referred you to, but the best way to deal with a lender or broker is tell him how you want to finance the co-op/condo/house and then ask him to send you a good faith estimate ("GFE") about rates and terms. Don't just walk in and say, "I want a loan. What can you give me?" They're just going to offer you the loan they get the best commissions on.
posted by deanc at 6:01 AM on September 23, 2011 [2 favorites]

8% is very high for a ten year t-bill;

huh? no its not. they were above 8% from roughly 1978-1991

yes this is an ARM. the broker is lying to you, find another one.
posted by JPD at 7:22 AM on September 23, 2011

I'd be careful about dealing with a lender specifically recommended by the co-op office, especially if you were told to talk to a particular loan officer. This smells of a kickback scheme.
posted by jon1270 at 7:35 AM on September 23, 2011

Houstonian, mortgages ARE different in Canada but a ten year loan that readjusts in the fifth year is not common, nor is it what the article you linked to refers to.
posted by saucysault at 7:44 AM on September 23, 2011

Apparently this is extremely common in Canada. Here is one article that explains it.

That's not quite what that article is describing exactly. Canada doesn't have the same kind of mortgage market that the US has where it's theoretically possible to sign a mortgage for a single rate that will last the whole 20-30 years.

Typically here, you get a mortgage that will last between 1 and 5 years, though it is possible to sign paper up to 7-10 years with some banks, it'll be fairly expensive. The payments are based on a longer amortization period -- 25 years is typical, 30 is considered extended, 20 accelerated -- but the loan term is still 1-5 years. And then, after that time elapses, you have to get a new mortgage based on the prevailing interest rates of the time. Whether you get that mortgage with your current bank or someone new is up to you.

So, in that sense, pretty much all Canadian mortgages are adjustable rate mortgages -- because you almost never sign your first mortgage for a term that approaches your amortization period. But within those 5 year terms that most mortgages are signed for, you can have fixed rates or adjustable rates as well.
posted by jacquilynne at 7:48 AM on September 23, 2011

In most countries it is very unusual for a long term loan (10 years +) to be Fixed Rate for its entire life. .

ie most loans in Australia or the UK are Tracker or Periodically adjusting rates. maybe fixed for the first X years but then the all move according to the Reserve Bank Rates.

Given that Interbank interest rates are around 0% at the moment I'd be surprised if you could get a Fixed Rate Loan at all.
posted by mary8nne at 7:51 AM on September 23, 2011

Check with an expert, but I don't think the lender is lying when they told you it isn't an ARM. If, as it has been mentioned, this works similar to loans in Canada, they are likely saying that you negotiate a new interest rate after five years. The interest rate would still be based on prime, though, so it is not like your rate would jump drastically. It could even go down, theoretically, if prevailing interest rates were lower. At least in Canada, adjustable rates loans are still based off of prime, so it's not like you are getting gouged with some arbitrary rate. Check everything out, but this doesn't sound completely out of the ordinary to me.
posted by Nightman at 8:21 AM on September 23, 2011

except that OP is American (at least as best I can tell from their posting history and their questions about the ADA), and yes this is an ARM. All loans in Canada are ARMs.
posted by JPD at 8:34 AM on September 23, 2011

huh? no its not. they were above 8% from roughly 1978-1991

I consider "last seen 20 years ago" to be unusual. That 1991 was 20 years ago scares me too, if anyone needs a hug. While there's probably nontrivial inflation in the pipe purely from monetary policy, to get affordability I want to scale that to wages which will also inflate some.
posted by a robot made out of meat at 11:09 AM on September 23, 2011

I consider "last seen 20 years ago" to be unusual. or if you are 30 years old they've been above 8% for a third of your life.

Lets not forget you are entering into a 30 year lived liability as well probably.

You make it sound like rates above 8% are in the tail. They decidedly are not. The average interest rate over the last 50 years is 6.8%
posted by JPD at 11:46 AM on September 23, 2011

All loans in Canada are ARMs

No, they are not. Variable rate mortgages are available but not very popular. With a Canadian VRM the amount of the weekly/monthly payment does not normally change over the term - I believe the sudden change in payment while being unable to get out of the term of the mortgage is what caused so many people grief in the US. In Canada the vast majority of mortgages are fixed rate, five year terms with maturity between 20-30 years. When it comes times to renew the mortgage most people play off their current lender with all the other banks/lenders to get to lowest rate. We have a pretty tightly regulated mortgage market, for instance 35 year terms are unavailable, because we have a government agency - the Canadian Housing and Mortgage Corporation - that looks after the housing market (for instance, I have never heard of anyone being underwater on a house here).

/end Canadian mortgage derail
posted by saucysault at 5:56 PM on September 23, 2011

yes they are. a loan with a 30 year amortization period where you have to reshop the interest rate every five years is a variable rate mortgage. you have interest rate risk. a fixed rate mortgage does not have interest rate risk. a fixed rate payment will remain the same no matter what happens to rates for the entire 30 year tenor of the loan. the same cannot be said of a loan where only the first five years of the rate are guaranteed.
posted by JPD at 7:17 PM on September 23, 2011

There is no "first five years of the loan" on a five year term. The entire term is five years and at the end the entire amount is due. So a NEW loan is drawn up and the rates, term, maturity/amortisation and payments are agreed. Canadians can choose a 25 year term but it usually is cheaper/more flexible to go with short terms. I know this is different than the US where terms of 25 -30 years are normal but the short terms do not make the loan an ARM, in ARM the rates fluctuate (or reset) ~during~ the term. You seem to have confused maturity with term, There is lots of info via CHMC to help explain it.
posted by saucysault at 7:42 PM on September 23, 2011

oh jesus christ. this ladies and and gentleman is why we need mortgage regulation

ok which loan carries more interest rate risk. (Hint - its the second because you are also taking spread risk.)

Loan 1: 30 year amortizing loan with a 30 year tenor. The first five years are fixed at x% after five years you either have the option to let the rate move to prime + x% for the remaining 25 years, or you can refinance ( termination fee) the loan into a new fixed rate or similarly hybrid fixed/floating mortgage that maintains the original amortization schedule, but may or may not price at a the same spread over prime.

Loan 2: 30 year amortizing loan with a 5 year tenor at a fixed rate. At the end of five years you have to reshop the loan and refinance into another 5 year tenor fixed rate loan. Again you also carry the risk of where the spread over prime will be for mortgages.

(Bear in mind nearly all ARMs in the US are fixed rate for the first 3/5/7 years so the act like loan 1)
posted by JPD at 5:58 AM on September 24, 2011

Response by poster: Saucysault: Sorry to be so dense... I googled CHMC and come up with lots of answers, like the California Healthy Marriage Coalition, but I'm pretty sure that's not what you're referring to, so fill me in.

I'm in the States.

Thank you all. As usual, you give me lots to think about.
posted by Prairie at 4:45 AM on September 29, 2011

Response by poster: It's called Northcountry Cooperative Federal Credit Union ( It looks as if all they do are coops.
posted by Prairie at 8:02 PM on October 6, 2011

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