The Economy

Jul 22, 2011 12:55 AM by Dr. Anya Winslow

Resurgence of the adjustable rate mortgage (ARM)

 

Adjustable-rate mortgages, also known as "ARMs," seem to be making a comeback, and if you can recall, it was only a few years ago many blamed ARMs for the housing crisis.

Now, ARM rates are extremely enticing, but should you really commit to a fluctuating mortgage rate?

As reported in CNNMoney, the first quarter of 2011 forecasted a terrible fate for growth in the new home sales sector. In fact, new home sales hit an all-time low since the government began keeping records. A variety of financial institutions and brokers became eager to boost home sales and earn commissions by resorting back to creative measures to help boost home sale numbers - ARMs.

University of Colorado Springs at Colorado Springs economist and professor, Fred Crowley, says, "An ARM is an even worse idea today. Interest rates are at an all-time low. They can only go up. So, next year, when your rate is adjusted, it will probably go up anywhere from three to six percent higher than what you get in at today."

Today's numbers averaged:
4.62% for a 30-Year Fixed
3.77% for a 15-Year Fixed
3.19% for a 3/1 ARM
3.25% for a 5/1 ARM
3.62% for a 7/1 ARM and
3.99% for a 10/1 ARM.

 

Based on those numbers Crowley says, "Adjustables today are not that much different than a 15-year fixed-rate. They're only about a quarter of a percent different [5/1 ARM versus the 15-year fixed]...In reality, you're not saving anything. Twenty, thirty dollars a month type-of-difference, and that's cheap insurance to know that your rate can never go up."

 

On the flip side, ARMs may be good from some individuals -- those who do not plan on being in the same city for a long period of time.

"If you get a five-year adjustable and you know you're going to be selling your house before then, maybe then it's good. But if you can't sell the house before that mortgage is adjusted, you're in trouble," says Crowley.

Even though we are just a little over a half of the way through 2011, one local new development has already met or surpassed its home sales in 2010; buyers in that development do not seem to be going for the low interest, teaser rate as offered by the ARM.

"We probably do four, four or five percent of ARMS in what we see here," says local new home sales director of New Home Star, Keith McKinney.

In fact, those who do opt for the ARMs, as McKinney mentions "are military background because they know that they're having some shifting and momentum."

Crowley mentions before buying a home make sure you don't spend more than you can afford. A rule of thumb is not to spend more than thirty percent of your income.

He also mentions if you are considering taking an ARM option, make sure there are no penalties if you decide to pay it in full; understand the loan terms; evaluate the number of years the arm is fixed; and also know what the lifetime cap of the loan is, which means the highest rate you could possibly pay over the lifetime of the loan.

Understanding the terms of the loan is extremely important.

Crowley mentions if you commit to an ARM, and once that ARM leaves the fixed period of time, and even if loan rates drop, borrowers are not entitled to the lower interest rate because of the nature of the ARM. In fact, once the loan leaves the designated period, automatically a certain percentage will be tacked onto the rate, which could be as much as four or five percent.

 Additional information:

The Recovery Act

Freddie Mac Adjustable-Rate Mortgages 

Consumer Handbook on Adjustable-rate mortgages

 

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