Why ARMs are Making a Comeback

Why ARMs are Making a Comeback

It wasn’t long ago that adjustable rate mortgages (ARMs) were broadly painted with the negative “sub-prime” brush. ARMs were abused during the most recent housing boom by both banks and borrowers. Since then, the nation has sobered up and borrowers and banks are acting more responsibly. Today, ARMs can still be viable alternatives to fixed rate loans. They are making a comeback because they make sense for borrowers with specific needs.

ARMS have variable interest rates that can periodically change. They typically have low starting rates which equate to low monthly payments. The low interest rates are fixed for a certain period of time before turning adjustable. The interest rate and payment can possibly increase numerous times after the fixed period.

ARMs used to be attractive options for savvy borrowers when mortgage interest rates were higher. They might have been inclined to take out an adjustable rate mortgage knowing that interest rates are likely to decrease. But, mortgage rates are not high now. So, why are borrowers still opting for ARMs?

Some take out ARMs knowing that they will only be in their home for a short period of time. They can have significantly lower payments during the fixed period and can hopefully sell their home before the interest rate begins adjusting.

Others who are buying a home or refinancing their existing mortgage opt for ARMs because they are confident that their income will increase with time and that they will be able to absorb higher payments in the future. Until then, they will have a lower payment that is more in line with their current income.

ARMS certainly fill a niche in the marketplace. While they are not for everyone, they can be smart tools for borrowers looking for short term benefits. It’s important to discuss all the pros and cons with a mortgage professional before making a decision.