Are Adjustable Rate Mortgages (ARM’s) Becoming Popular Again?

Adjustable Rate Mortgages are Gaining Momentum Once Again

Adjustable rate mortgages make sense for anyone who believes they will not be staying in their home for the long term. What got so many people in trouble over the past few years is buyers eager to buy a home assumed that by the time the rate adjusted, there would be enough equity in the property to refinance to a fixed rate mortgage. WRONG – it didn’t happen that way. Many of these borrowers were on a 3 and 5 year adjustable rate mortgage and really got hurt when the market took a dive.

If you are almost certain you will only be in your home for 5 to 7 years then the new ARM’s might make sense as there can be a significant savings with an ARM versus a 30 year fixed rate.  Generally ARMs are  one to one and a half percentage points below those of 30-year fixed-rate loans.

The most popular ARMs are the “5/1” and “7/1” – interest rates are fixed for the first 5 or 7 years, then adjusted annually at a capped rate. It is important when evaluating these types of loans to understand what the “cap” is what index the rate is tied to.

The FHA 5/1/1 ARM is appealing to many borrowers. Essentially the rate is fixed for the first five years, then will adjust 1% each year for up to 5 years. So if you started out at 3.5% the highest the rate can ever go is 8.5%.

Lenders are much more conservative in qualifying borrowers for ARM’s. In many situations they are using the adjusted rates to qualify the borrowers to ensure that when at the end of 5 years and beyond using the worst case scenario for the rate adjustment that the buyer will  be able to handle the payments.

If you are someone who plans to stay in your home for more than the term of these adjustable mortgages, then a 30 year fixed rate is for you. Based on history, speculation that the market will appreciate enough for you to refinance has not been a good ally.

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