Why home buyers should stay away from ARMs

July 11, 2007 at 10:02 am Leave a comment

Chances are, if you’ve been looking at buying a home, the adjustable rate mortgage has come into play. You’ve got to choose between a fixed or adjustable rate. The ARM sounds like a great idea because you can afford a much more expensive home and have a low interest rate. If you’re leaning that direction, I’d suggest you think twice.

Looking at the numbers, 4.25% and 6.25% can make a difference when you’re dealing with mortgages. These rates are quite common at this time with ARMs and fixed rate mortgages, respectively. But, the term adjustable should sway you from what seems obvious. Historically speaking, rates are at an all time low. Anybody who was around during the Jimmy Carter debacle, remembers interest rates up 12%, 16%, and even 19%. In that light, 6% is an excellent rate. And, in a fixed rate mortgage, it’s not going to change, at all.

Quite the contrary with the the ARM. Sure, you might start out at 4.25%. But, each year that rate is going to adjust. And guess which way it’s going to go? Up. That’s what causing the increase of mortgage default in America. It’s not the decline of home values, which is debatable, but the adjustment in rates on ARMs that people signed up for so they could buy the house with the pool that they normally couldn’t afford.

Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
–Nightmare Mortgages, September 11, 2006, Business Week

A good piece of advice, don’t buy a house you can’t aford the monthly payment for at a fixed rate. Depending on the part of the country you live in, think about getting a 15 year fixed rate mortgage as opposed to a 30-year. You’ll save thousands in interest payments and be able to weather the rate hikes.

Related links:
Navigating Subprime Mortgage Mess
Nightmare Mortgages

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Entry filed under: Real Estate and Mortgages.

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