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Full disclosure here, I have an ARM on an investment property and it has been a really great thing for me. I am not loosing my property to the bank, my interest rate didn't increase, and I don't feel trapped and can't sleep from worry. And I think I would do it again, their I said it!
Of course ARM's are not for the faint at heart and do not provide the sense of security that many get from a 30 year fixed mortgage
Adjustable-rate mortgages are rising in popularity again. Lenders say they have learned from their mistakes of the past decade, but have borrowers?
By doubleace on Mon, Mar 21, 2011 11:36 AM
This post comes from Lynn Mucken at MSN Money.
Adjustable-rate mortgages are making a comeback. It's official; after all, the news appeared in The New York Times.
You remember ARMs, don't you? They were the sweet sirens of the last couple of decades, luring Americans into the homebuying or refinance market with low initial interest rates and unspoken but hinted-at guarantees that nothing could go wrong.
Of course, things did go wrong -- terribly so -- when the real estate market imploded in 2006. ARMs weren't solely to blame for the real estate pyramid scheme whose collapse still haunts our struggling economy, but they did their part.
Now ARMs are back -- up to 10% of all mortgages issued, double last year but still far from the 70% in 1994. So the questions once again are: Are they safe? Are they right for you? The answers are: Maybe, and maybe.
An adjustable-rate mortgage is a relatively simple lending device: The borrower gets the money to buy or refinance a home at a lower interest rate than is available through the traditional 30-year mortgage. That means lower house payments that you can afford now. Somewhere up the road -- six months, five years, seven years, whatever is specified in the contract -- the interest rate begins to adjust up or down according to a set formula based on interest-rate indexes.
It usually goes up -- inflation is almost always with us -- but in theory the borrower's income and home value have at least kept stride, so you can make the bigger payments or sell the house. The alleged safety net is that, if you are like most Americans, you will have sold your home and moved long before the higher interest kicks in, or you can easily slip into a less-volatile 30-year loan.
Unfortunately, it didn't work like that in 2006 and the unhappy years that followed. Too many loans had been granted to people -- the infamous subprime borrowers -- who bought too much house, were overextended even by the opening monthly payment or fell for lending gimmicks that allowed them to pay a "minimum" amount that actually increased their debt on the home. It's an old credit card trick, but when it is used on a $500,000 loan instead of an $800 bill, it is deadly.
Such people lost their homes, which helped collapse the housing market, which in turn destroyed the home value of even prime borrowers, who had no trouble paying their mortgage but couldn't sell their home because they owed more than it was worth on the market.
Lenders say that won't happen again.
They insist they won't lend to questionable borrowers. "An adjustable now is basically a prime product," Michael Moskowitz, the president of Equity Now, told The New York Times.
In addition, they say that the six-month rate change and high interest caps have mostly been replaced by relatively staid 5/1 or 7/1 ARMs (five or seven years at the initial interest rate, followed by annual changes in interest) with a maximum eventual cap 6 percentage points above the initial rate.
The savings available through ARMs are undeniable. Sean Bowler, a loan officer at DRB Mortgage, told the Times that someone borrowing $500,000 with a 5/1 ARM at 3.5% would save $42,507 in the first five years, before it adjusts, compared with a 30-year fixed-rate loan of 5.25%. A 7/1 ARM at 4.125% would save $38,330 over the first seven years.
So, should you go for an ARM?
Yes, bring it on.
•If you have a large down payment that virtually ensures that you will still have equity in the home when the ARM begins to adjust upward.
•If you are reasonably sure you will be selling the home before the interest rate starts climbing. This works especially well if you are 60 and plan to retire, and move, at 65.
•If you have enough in savings to weather a reversal in the market. You don't have to plan for 2006-09 type of debacle, but be cautious.
•If you are in a secure job with reliable expectations of salary increases.
Nope, not for me.
•If this is the home of your dreams, the neighborhood is perfect, and you want your babies to grow up here.
•If the payments are a stretch now, and the prospects of better income are shaky.
•If you're the anxious type. Worrying for five or seven years about what might happen is not healthy.
•If your marriage isn't solid. It's hard to buy a house on one income.
In all cases, shop carefully. Compare ARMs with conventional 30-year loans. Check out the fees. Always do the math. Get advice from a trusted friend or relative who understands numbers. Be aware that there are big differences between dreams and reality: Dreams go poof. Bad loans seem to stick around forever.
And one last thought: If the loan sounds too good to be true, it probably is. Despite ARMs' spotty history, almost nothing has been done to prevent bad things from happening again. Bad people will always be around.
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