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Jeff Brown on the Hazzards of Adjustable Rate Mortgages (ARMs)

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.

Topics: Mortgages | 4 Comments »


4 Responses to “Jeff Brown on the Hazzards of Adjustable Rate Mortgages (ARMs)”

  1. Rob Says:
    May 25th, 2006 at 2:09 pm

    I don’t think the problem is as big as people make out. 2-5 years is a fairly long time, especially as you get out toward 5 years. At that point people can refinance and get a new teaser rate. As you mentioned, there is also the chance rates can go down, or at least stay the same. Many people also “grow into” their mortgages, meaning maybe affording the higher rate is a stretch now, but in five years their incomes have grown more than the relative increase in the mortgage. Finally, many people don’t even stay in the same house that long and therefore don’t have to worry about what happens when the lock espires.

  2. Chris Says:
    May 26th, 2006 at 9:02 am

    First time poster, long time reader…

    I agree with Rob, I personally have an ARM Mortgage on my house and I did it for several reasons. This is my first home, and although I could of afforded something more expensive, I went with an average priced home. In addition, to save more money, I took a 5 year ARM knowing there is little chance I would be in the house in five years. Also, I pay above what my minimum payment is and I invest extra money I save by not having a 30 year fixed. If your smart and do your research an ARM is a wonderful thing.

  3. djb Says:
    May 26th, 2006 at 10:58 am

    True if you are smart and do your research ARM’s can be great. Unfortunately too many people who get ARM’s have no idea what there payment will be when it adjusts and all of a sudden can’t make ends meet. Just look at forclosures. They are up 79% over last year. Not to mention the $1 Billion in loans that are due to reset in 2007.

  4. Mike Says:
    May 26th, 2006 at 2:23 pm

    ARM’s due pose some risk, but for instance, if you purchase a home that you know you will only be in for 4-5 years, a 7/1 ARM seems like a good alternative to a 30 fixed. I like Chris’s comment – I am also a long time reader, great blog!

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