Much Ado About ARMs – Why the Adjustable Rate Mortgage Deserves a Second Chance

In today’s real estate market, there are many misconceptions about ARMs – which are often perceived as risky choice, rather than a feasible mortgage option.

Some of this stems from the mistaken belief that ARMs were the primary cause of the 2008 real estate crisis that left many homeowners underwater on their mortgages – which is not the case, according to Waterstone Mortgage SVP – Product Development Kim Newby. 

“Prior to the housing crisis, there were a variety of ARM programs with characteristics that are not representative of today’s ARMs,”says Newby. “Before the crash, the fixed-rate periods at the beginning of ARM programs were much shorter than they are now, lenders were able to advertise extremely low ‘teaser rates’ that misled borrowers, there were high lifetime caps on the interest rates, and negatively amortizing ARMs were available –which no longer exist.”

Ultimately, the housing crisis was caused by a variety of factors, including decreasing property values, homebuyers misunderstanding the mortgages they were offered, and lenders failing to verify their borrowers’ income and assets, according to Newby.

“It was the perfect storm – and it further perpetuated the meltdown,” she says.

In contrast, today’s ARM programs are almost unrecognizable when compared with their predecessors.

“There are much tighter lending standards for ARMs now,”says Newby. “ARMs are now regularly amortized, there are no pre-payment penalties, and the interest rates are predictable and can only fluctuate within a pre-determined span. In addition, these programs have stricter lifetime caps and are more regulated now than they were before.”

Because of this, ARMs can be a viable – and even favorable – mortgage option for many homebuyers. For those who know they will be in a home for a short time span (five to 10 years), an ARM can be a more affordable option – as the fixed period in the first several years of the loan’s life has a lower interest rate than most fixed-rate programs.

Another scenario to consider: First-time homebuyers who would like to quit renting could benefit from an ARM’s lower interest rate in the initial fixed period, especially if they believe their income will increase considerably in the next five to 10 years.

Additionally, homebuyers who believe they will have the resources to pay off their mortgage entirely in a shorter time span could also save money by choosing an ARM as opposed to a fixed-rate program.

“ARMs are no better or worse than a fixed-rate loan,” says Newby. “It depends entirely on the homebuyer’s unique situation. That’s why it’s best to consult with a mortgage professional before making your decision – so you can know that you are making the best financial choice for your scenario.”

Are you wondering if an ARM might be the right choice for you? Contact us to schedule a complimentary consultation to learn more about your mortgage options.

With adjustable rate mortgages, the interest rate is variable and may increase or decrease every year after the initial fixed rate period based on changes to an index. This could result in an increase in the monthly payment. All loan requests are subject to credit approval as well as specific program requirements and guidelines. For some programs, income and property restrictions may apply. Information is subject to change without notice.

This article is presented to you by Waterstone Mortgage. Please click here to read the full article.