Hello to ARMS: Variable-Rate Loans Make a Comeback

weighing ARMs against fixed-rate mortgagesRoundly blamed as one of the key reasons behind the collapse of the housing market, the once-popular ARMs--adjustable-rate mortgages that started low and then adjusted to higher and less affordable payments--have crept back into the marketplace. The home-loan product that was virtually eradicated during the housing bust is now claiming about a 6 percent share of the market, according to the Mortgage Bankers Association. In 2006, ARMs were a steady 30 percent of the loans being written; by 2008, they'd fallen to less than 1 percent of the market.

The ARMs of 2011, however, bear little resemblance to the ARMs of 2006.
Gone, for the most part, are the loan rates that fluctuated monthly. Gone too are the loan products that lured you in with next-to-nothing interest rates but quickly rode the elevator up to the level where people were forced into foreclosures. Today's ARMs have lifetime caps and stay flat for initial periods of three, five or seven years.

Still, can we trust them? Be prepared for the mortgage industry equivalent of, "It's not guns that kill people; it's people who kill people."

"There were good ARMs and there were bad ARMs," says Michael Moskowitz, president of the New York-based Equity Now, a direct mortgage lender. Moskowitz is one who believes the baby shouldn't be thrown out with the bathwater. The product has its place, he says, and it behooves people to consider an ARM in certain home-buying situations.

Certainly people are drawn to these loans now for the same reasons they were a sought-after commodity in the housing boom years: They offer cheaper monthly payments. Most agree that for buyers who don't intend to stay in the house beyond the fixed-rate period (typically five years), this is a legitimate and safe way to save money. For example, if you're borrowing $400,000, a five-year ARM offered at the current 3.125 percent interest rate would result in a monthly mortgage payment of $1,730.50. The same loan at a 30-year fixed rate of 4.5 percent will have you writing a check for $2,026.74 each month. That's an approximate $19,000 savings over the five years of the ARM.

The buzzword in mortgage circles today is suitability, says Chris George, founder and CEO of CMG Mortgage in San Ramon California and secretary of the California Mortgage Bankers Association.

"Is it really suitable to put a couple of 80-year-olds in a 30-year fixed-rate loan?" he asks. "They aren't going to be around to see that mortgage paid off."

George joins the growing ranks of professionals willing to look at ARMs again with a fresh eye. "Any time interest rates tick up, you can see a greater demand for alternatives that are lower," he says. But common sense -- in the form of loan qualification standards -- has to be applied. "You don't give your brand new car to your 16-year-old new driver," he said, "and you don't give a loan to someone without requiring proof of their income or ability to repay it."

The key to what kind of loan is best for you is how you answer the question: How long do you intend to live in the house? If you intend to live in the home for longer than the term of the ARM, things become more of a gamble.

So how long do we actually live in our houses? The median home ownership is now eight years, according to the National Association of Realtors. This is up from just six years in 2007 -- probably a reflection of the housing market crash, tightened lending standards and the overall economy, which shed 8 million jobs. But NAR spokeswoman Stephanie Singer also notes that a recent NAR study found most recent buyers saying they intend to live the next 10 years in the home they just bought.

What's sobering is how many people don't actually understand the mortgage game. A new Zillow Mortgage Marketplace study found that almost 60 percent of prospective home buyers don't understand how ARMs work. When they were asked if interest rates on a 5/1 ARM always reset to a higher rate after five years, most answered yes. In truth, the rate adjusts to whatever the prevailing rate is in five years, which means they could go down.

The moral of that story is, whether you choose a fixed-rate or an ARM, do your research and know what you're getting into up front.

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Josh

This was the lead of the housing collapse, but our wonderful law makers are wanting to prey on the rest of us that didn't get sucked in the first time. Our government is broken and we the people need to fix it TOGETHER before it is to late. P.S. the clocks ticking

May 10 2011 at 7:31 AM Report abuse rate up rate down Reply
Randy

don,t fall for this. rates will go up.

May 10 2011 at 7:22 AM Report abuse rate up rate down Reply
dmfischetti

With interest rates so low why do we nned to bring arms into the picture again??? They were used when interest rates were 10% to help people qualify for a mortgage. Don't need them now. What we need now are good paying jobs so that people can afford a mortgage.

May 10 2011 at 6:32 AM Report abuse +1 rate up rate down Reply
Wild Wayne

I see the bank thieves are back stealing equity and homes. One of their main paths was the ARM. A good ARM should be capped to less than 2% per year. Still it will not make much difference as long as the banks are allowed to steal and then have the feds cover any truly bad loans.

May 10 2011 at 6:09 AM Report abuse rate up rate down Reply
change

ARMs are good for the younger gen. I used one when starting out and interest wa at 10% plus. By the end I actually had a rate of under 6%. I do not believe now is a good time since rates are so low.

May 10 2011 at 5:19 AM Report abuse +1 rate up rate down Reply
Burl Beavers

nothing wrong with ARMS. Most ARMS do not have any penalty for cashing out early. Done right they will frequently save the purchaser alot of $$$$.
I know 1 individual who saved $18,000 on a 7/1 Arm when he moved in the 5th year. In fact had his ARM if it had converted at that time , his new rate would have been lower than he started with. There is nothing wrong with ARMS
But you do have to understand how to use them, and when to cut and run if necessary.
The big problem was not only were the banks Selling houses to those who had no cushion to fall back on if needed, Many of these people lost their jobs and it did not matter what kind of loan they had ............they were dead ducks
It is a heck of a mess and the wost is just begining............................2011/2012 is going to be a Wild ride.

May 10 2011 at 12:34 AM Report abuse rate up rate down Reply
me817

ARMS need to be outlawed. The interest rate is only part of the costs. There are additional fees, usually 2.25% added on to the interest rate. Most reset every year and are based on the Federal reserve cost of funds. With the US with TRILLIONS in debt, they will never, ever go down, even if you live to be a hundred.

May 09 2011 at 11:59 PM Report abuse +2 rate up rate down Reply
chasmaster4

trust them hell no! trust banks no! trust the government to go after the banks no! greed put them in this mess and blame the little guy

May 09 2011 at 9:52 PM Report abuse rate up rate down Reply
fosterevans1

THEY NEVER LEARN, BANKERS GREED.

BETWEEN BAD BANKS AND OUR ELECTED OFFICALS AND THE GOOD OLD
BOY CLUBS IN WASHINGTON DC AND WALLSTREET THE UNITED STATES IS
IN FOR FAILURE AND IT IS COMING SOON. THIS COUNTRY WILL FAIL DUE TO
GREED AND THE TAX PAYERS BAIL THEM OUT IF THERE IS AGAIN.

TAKE TIME TO SEE WHO YOU ARE REALLY VOTING FOR.
STOP DOING BUSINESS WITH BAD BANKS THATS STEAL FROM YOU,
EXAMPLE; UNLAWFUL FORECLOSURERS, USING CHEAP MONEY
FROM THE FEDS TO CORNER THE MARKETS TO DRIVE UP OIL,GAS, FOOD
AGAIN FOR GREED NOT TO BUILD A STRONG UNITED STATES TO HELL
WITH THAT, JUST LOOKING LINE THEIR OWN POCKETS.

LOOK AROUND YOU, FAILING CITIES, FAILED SCHOOLS,
MAJOR LAYOFF,S OF TEACH, SEE WHAT THAT DOES TO THE UNEMPLOYMENT
ROLLS WE ARE NOW AT 9% NATIONALLY JUST WAIT, DEADLINES ON STATE
AND FEDERAL BUDGETS. I HOPE YOU GET THE POINT.

May 09 2011 at 6:25 PM Report abuse +1 rate up rate down Reply
1 reply to fosterevans1's comment
Hi Catmom!

How are they going to bail them out when the money that is printed is no good? Foreclosure will be the least of our worries.

May 10 2011 at 3:34 AM Report abuse +1 rate up rate down Reply
Donald G

Since interest rates are about as low as they can go then it stands to reason that when a ARM does readjust there is only one way for the rate to go. And it ain't gonna be in the favor of the homebuyer.

May 09 2011 at 6:10 PM Report abuse +1 rate up rate down Reply