October 31st, 2017 6:59 AM by Jackie A. Graves, President
Adjustable-rate mortgages are being welcomed
into homes again.
Many homeowners shunned adjustable-rate mortgages, often called
ARMs, during and after the recession, but according to an analysis from the
trade publication Inside Mortgage Finance, the number of adjustable-rate
mortgage originations shot up more than 40 percent from the first quarter of
this year to the second, which was a major jump even accounting for
you're looking for a home,
and you haven't been thinking about an ARM, you may wonder – should the wisdom
of the crowd be trusted? If you're looking for a new house, or if you're
thinking of refinancing, might you want to get an adjustable-rate mortgage?
might. You also might not. As usual, it depends on whom you talk to, and
mostly, on your own financial situation and your own tolerance for risk. Let's
walk through why ARMs became hated, why you may want to get one – and why you
may want to stay away.
Why some people hate them. ARMs
start off with a fixed interest rate for a short period of time (often three
years). Then the interest rate, just like its name suggests, adjusts. You may
like how it changes (if the interest rate and monthly payment goes down), or
you may not (if it goes up). During the last
recession, ARM interest rates generally went up, and some of the
ARMs were structured in devastating ways for the consumer (but in awesome ways
for the banks).
instance, some ARMs came with negative amortization, so you'd pay less than the
minimum interest every month – meaning the amount you owed on your mortgage
increased rather than decreased.
are mostly better now, without those tricks,
according to industry experts. Meanwhile, one trick that you should
employ is a tip offered by the Consumer Financial Protection Bureau: Ask the
lender to calculate the highest payment you may ever have to pay on any ARM
loan that you're looking at. Lenders are required to give you that information
on your Truth-in-Lending disclosure within three business days after applying
for a loan. Then you'll know what the worst-case scenario with an ARM will be,
and you can work from there.
Why you may want to get an ARM. If
you want a low mortgage interest rate, this is the way to go. And to that, you
might understandably ask, "Isn't that what everyone wants?"
course. But, as noted, ARMs can also go up, which is why not everyone gets one.
this may be a good time to start reconsidering any dislike you have for ARMs.
Fixed mortgage interest rates have been creeping
up in recent weeks, and an expected interest rate hike from the
Federal Reserve in December could have an effect, making future monthly
Doyle, consumer lending product and pricing executive at Bank of America, says
that you're a good candidate for an ARM if these three situations apply to you.
--You aren't going to live in
the home for many years. He says if you know you will be
relocating due to your career or because you'll be adding onto
your family or downsizing (your kids are going to college), then you'd want to
consider getting a hybrid ARM with terms of five, seven or 10 years. (That is,
you start with a fixed interest rate for a period of five, seven or 10 years –
and then move to an adjustable rate.)
--You know your income will go
up. In other words, if you know you can cover the mortgage if
your payment does go up and want to enjoy the lower interest rate in the
meantime, you may want to consider an ARM. "You need to be ready for the
adjustable rate feature – and assume that your payment will adjust up,"
--If cash flow is a priority. If
you struggle mightily with cash, then, obviously, maybe rethink buying a house.
Doyle is talking about when your money supply is fine, but you have one big
expense on the horizon. "For example," he says, "if a parent is
putting a child through college, homeowners might want to evaluate the benefit
of the lower initial monthly payment of an ARM. A lower mortgage payment may
help them better manage their other monthly obligation."
Why you may not want to get an
ARM. For starters, it isn't as if fixed-rate mortgages are at an
all-time high right now, points out Douglas Robinson, a spokesperson for the
nonprofit NeighborWorks America, which supports community development and
affordable housing in the U.S.
it's not at its all-time low point, but fixed rates are very, very low,"
what of the popular argument that a consumer takes an ARM, and if the rate
increases later, he or she simply refinance?
problem, Robinson asserts, is that it isn't always that simple.
say, 'Well, when the rate goes up to a point above the prevailing fixed rate,
I'll just refinance into a fixed rate,'" Robinson says. "But that's
not easy to do if the homeowner's credit
situation changed, or their income declined, or if the home value
dropped. Yes, these are not the likeliest situations, but they do happen. Why
take the risk for such a small difference in payment?"
Carey, vice president, residential lending manager at Tompkins Mahopac Bank in
Mahopac, New York, has a similar concern. He isn't anti-ARM and says that some
homeowners, particularly those who aren't going to live in the home for all
that long, are "the perfect marriage of need and circumstance."
he points out that "there is no way to predict where the interest rate
will be when you're ready to refinance. So you may be faced with refinancing
into a fixed rate higher than your current adjustable rate."
means, of course, that you'd stay with the adjustable rate, but it still might
be much higher than you would like to be paying.
is an unlikely scenario, though, Carey adds. "In most cases rates do not
fluctuate wildly, even over a period of years," he says.
By Geoff Williams – To view
the original article click here