“By using teaser rates, borrowers could be enticed into an initially affordable mortgage in which payments would skyrocket in three, five, or seven years.” —Investopedia
Many have pointed to Adjustable Rate Mortgages as THE cause of The Great Recession of 2008. The media has done an excellent job of stoking fear into the hearts of the everyday consumer regarding ARMs, sharing story after story of individuals who had to file bankruptcy, short sell, or foreclose because of their Adjustable Rate Mortgage.
So, ARM’s are bad, and no one should ever consider taking one. Right? Wrong.
Stick with me before you dismiss the rest of this blog. An Adjustable Rate Mortgage is amoral. It’s not good or bad, it is just a home loan product. However, the people behind the ARM and how the ARM is obtained or used can be good or bad.
It goes bad when people obtain an ARM (or any home loan for that matter) without knowing how it works. Too often, shady mortgage professionals were less than transparent with consumers. ARMs were being used because the mortgage pro was getting a bigger commission.
My uncle has intentionally chosen ARM loans for over 20 years and has paid much less interest than the person who blindly chooses the 30 year fixed because “ARMs are bad.” The difference between my uncle and the everyday borrower? My uncle knows what he is getting into with ARMs. He understands his loan well and has a plan to properly leverage the mortgage product he takes on.
If you’d like a more in-depth understanding of Adjustable Rate Mortgages, check out this article: https://www.investopedia.com/terms/a/arm.asp.
A quick and simple explanation is this: You get a fixed rate for a certain period of time (typically five, seven, or 10 years) and after that fixed period, your interest rate (and your payment) adjusts based on market conditions and other factors.
ARM loans may be something to consider the next time you obtain a home loan.
Why? The rates on ARM loans have recently changed. They are very low and very good.
It used to be a standard thing; rates were always lower on ARMs than they were on fixed loans. People were never really scared of ARMs because they understood the fixed period and had a plan for what to do when the adjustment came. Some would plan to sell the home. Others would plan to refinance. There were even a small percentage of people who wanted it to adjust because they believed the market would change in their favor and the payments would adjust down. Either way, people who took ARM loans had a plan.
Then the great recession came. No one wanted an ARM. Market conditions combined with government oversight sent fixed rates way down. Like, if you haven’t looked into refinancing yet, you really should do that because fixed home loan rates are really low and you need to make sure you are paying the lowest rate possible. (schedule an appointment with one of our Home Loan Advisors here . As a result, ARM rates were higher than fixed rates. And it was this way for several years.
But the market has changed.
Fixed rates are still great (have I told you to look into refinancing yet? Cause you need to.), but now ARM rates are even better! That’s right! The market has changed in such a way that Adjustable Rate Mortgages are very low. So low, that some people may want to consider them the next time they get a home loan.
That said, ARM loans are not for everyone. They are only for people that have a plan. As I have mentioned several times, you need to know important details about the mortgage loan you take on and be comfortable with them. For an ARM you need to know the fixed period, the maximum and minimum adjustments, when it adjusts, and what market conditions control the adjustment. More importantly, you need to have a plan for what you are going to do when the adjustment comes.
Here is why:
If your plan “A” is to refinance before the adjustment period, what will you do if you can’t refinance? What if something happens to your credit or your income that prevents you from qualifying for the refinance? Then what? You may want to get comfortable with a back up plan “B” of selling the home.
The bottom line is this: Adjustable Rate Mortgages are back.
The rates are really good. So, they may be something you want to explore with your Home Loan Advisor the next time you obtain a home loan. Just be sure your mortgage pro properly explains the details of the ARM and you have a plan of attack.
If you would like to talk to one of our Home Loan Advisors about an ARM loan you may do so by scheduling an appointment below.