Adjustable-Rate Mortgages May Still Work for Those Who Know What They Can Afford
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adjustable rate mortgages, ARM April 18th, 2008Adjustable-rate mortgages aren’t very popular these days. Thanks to the bad press ARMs have been getting, home buyers are flocking to the security of fixed rates.
But that does not mean ARMs are dead. While mortgage experts are quicker to point out potential pitfalls of ARMs, they say such mortgages still can be workable for some people. Borrowers must consider the risks of rising interest rates and be honest about what they can afford today and down the road.
ARMs have interest rates that change at set intervals, depending on the type of mortgage. The five-year ARM, often referred to as a 5-1, is among the most popular ARMs. Payments are fixed for the first five years of the mortgage, at a rate below the prevailing 30-year loan. At the start of the sixth year the interest rate is reset based on an index, which varies from lender to lender.
Those re-setting rates have put ARMs at the heart of much of the housing turmoil that is now rocking Michigan’s economy. Many consumers who took out adjustable-rate mortgages at the turn of the century – when interest rates were at historic lows – saw their monthly payments surge, sometimes double, when their mortgage rates reset. Many ended up losing their homes.
However, for those consumers who are willing to take on the risk – and can afford the higher payments down the line – ARMs still have merit. That strategy works well, for example, for employees who expect to be transferred frequently, for growing families who know they’ll need more space, or for soon-to-be empty-nester households who know exactly when they’ll need less space.
Why pay the extra interest required on a 30-year loan if you know you won’t hold the loan anywhere near that long?
Plans change, of course, and homeowners who thought they had matched their mortgage to their expected stay in a house may find themselves trapped. In the current market there is no guarantee houses can even be sold. So, if you plan to take out an ARM based on what you think might happen, it would be wise to have a Plan B.
Tags: adjustable rate mortgages, ARM
