Gotcha Guide™: Why Adjustable Rate Mortgages (ARMs) Don't Scare Me
NOTE: This article is part of the forthcoming book, the Gotcha Guide™ to Buying or Investing in Real Estate. Email us to join the mailing list for the release date. By DeeinAustin™
Remember Adjustable Rate Mortgages (ARMs)? Here's a tip. They're mortgage loans that gained popularity in 2003-2005. Now pick the best explanation of their fate from 2006-2007...
A) They're little demons that caused our foreclosure rate to increase to the highest in American history, prompting over 200 lenders close their doors.
B) Along with sub-prime loans, they were the downfall of the U.S. real estate and mortgage market, sending investors (i.e. speculators) and the secondary lending market running for the hills.
C) They aren't so bad if used wisely and may be converted to fixed-rate loans with minimal paperwork and about a $250-$500 fee.
D) All of the above.
My ANSWER: Is D... All of the above, with caveats. I do agree that ARMs are one of many reasons why the lending market is now in recovery. The truth is that lending guidelines became lax and borrowers weren't being responsible.
TOP 3 REASONS WHY ADJUSTABLE RATE MORTGAGES AREN'T THE BOOGEYMAN
- ARMs originally served a great purpose. They didn't hide under our beds and force us into higher interest rates. They allowed buyers to have lower interest rates during the first 3-5 years of the loan, lowering their payments and allowing them to qualify for a better home.
- Most borrowers refinance once the ARM starts adjusting. Some ARMs have a conversion clause that's pretty easy to exercise. If you have an ARM, check your paperwork. You may see a clause that reads: “At the end of the full first mortgage year, the borrower may convert to a fixed rate equal to the prime rate plus one for a fee of $500.”
- Government help is here. In December, President Bush passed a freeze on adjusting subprime mortgages issued between January 2005 to July 2007. This isn't without controversy. Treasury Secretary Henry Paulson defended the freeze yesterday and even asked for an extension of the program for prime rate borrowers.
WHY LOVE IS NOW LOST ON ADJUSTABLE MORTGAGES
ARMs are like coffee, tea, and chocolate. Many buyers thought they were irresistible. Traditional borrowers thought they were evil, so stayed away. Some couldn't help themselves and over-indulged.
Even banks had a field day in recent years against better judgment. The addicted ones simply got the shakes and eventually shut down after the sugar rush settled.
Adjustable Rate Mortgages were useful when they were first introduced and can still be helpful. Unfortunately, with the 5-year mortgage freeze, you won't see ARMs for a long time.
In the meantime, borrowers need a strong relationship with trusted lender who will provide professional guidance on the best loan products for their situation. In many cases, it means saving for a down payment and making improvements to credit scores.
WANT TO READ MORE? GET THE GOODS...
- More about Bush's mortgage freeze and Paulson's defense.
- Why some think the freeze will doom us all.
- Is the U.S Housing Gloom Lifting?
- Cheer up! At least Austin's growth rate is among the best.
- Texans should be fed up with the real estate doom and gloom.
-All rights reserved © Dee Copeland 2008
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