Is it time to rethink adjustable-rate mortgages?
- Politics, Lifestyle
- Comments Off
You don’t hear a lot about adjustable-rate mortgages (ARMs) these days. That’s too bad, because they’re still a good choice for many homebuyers, believe it or not.
ARMs can be a very smart choice for homebuyers who are not planning to stay in the home more than a few years. Think about it – if you’re planning to sell the home within seven years, as many homeowners do, what difference does it make if you have a seven-year ARM? Why not take advantage of the lower rate and pocket the difference?
They’re also a popular choice for savvy investors who keep a careful eye on how they allocate their money among various investments, but if you’re in that group, you probably don’t need to be reading this article.
ARMs then and now
Unlike fixed-rate mortgages, ARMs start out with a certain mortgage rate for the first few years, then “reset” to a new rate after that period is over. The new rate is based on a formula tied to the prevailing rates at that time. The initial rates are lower than on fixed-rate mortgages because lenders are locking the rate in for a relatively short time, usually five to seven years, compared to 30 on a typical fixed-rate mortgage.
ARMs got a bad reputation during the housing bubble and subsequent crash, when they got a reputation as “exotic” mortgages that enabled people to buy more home than they could afford and got them into trouble when the loan reset and their monthly payments increased, sometimes dramatically.
What got lost in the turmoil was that the problem wasn’t so much with ARMs per se but with all the bells and whistles that got loaded onto them. Things like balloon payments, steep rate increases after the initial period, interest-only loans, negative amortization and other then-popular features created situations where many borrowers didn’t understand just what they were getting into and easily ran into financial difficulty. Read More (Fox29/Haverkamp)
FLConnection/ A. Varona, Editor