By JLP | May 25, 2006
With interest rates rising, adjustable rate mortgages are becoming more risky for borrowers. Banks and lender love ARMs because it gives them the opportunity to take advantage of rising interest rates. However, what’s good for the banks and lenders is not necessarily good for borrowers.
According to this article by Jeff Brown of the Philadelphia Inquirer, many borrowers seem to be turning to ARMs so that they can AFFORD the note. This is very risky since there’s a good chance that interest rates could rise in the future, which would mean higher payments for these borrowers. Sure, there’s a chance that interest rates could drop, which would mean lower payments in the future.
The average rate on a 30-fixed mortgage is currently around 6.6 percent. An ARM, on the other hand, can be had for around 6%, according to the article. However, this is most likely a teaser rate and will be adjusted after 2 – 5 years. The risk with the ARM is that once that teaser period is over, the new rate could be significantly higher, which would mean higher payments. If the borrower could only afford the payments at the teaser rate, they are going to be in real trouble once the rate goes up. This is a problem people face when they only look at the short-term.