Right after the mortgage meltdown and the financial crisis, many people began shunning adjustable rate mortgages. Many of these mortgage products featured “teaser rates” that re-set after a few months, or that had other characteristics of subprime loans. However, as the economy recovers somewhat, and as borrowers look for good deals, ARMs are making something of a comeback.
The New York Times  reports that ARMs that re-set five to seven years down the road, with a cap after the fixed rate period, are on the rise. One of the reasons that borrowers are looking into ARMs is due to their usually lower interest rates. The initial rate on an ARM is often lower than what can be had on a fixed rate mortgage, and it can mean some savings on interest. However, it is important to make sure that you can truly afford your mortgage — no matter what type you get.
Can You Afford the New, Higher Mortgage Rate?
One of the ways that mortgage lenders convinced borrowers to get ARMs in the past was by insisting that they would probably make more money later, and be able to afford the higher mortgage rate. Another ploy was to tell borrowers that they could just refinance  down the road. Of course, with the housing market crash and financial crisis, home values plummeted so that refinance was impossible for many with re-setting mortgage rates — and wages haven’t kept pace with other costs so many were unable to cope with the higher payments.
Before you agree to an ARM, you should consider whether or not you could afford it with the higher payment. Find out what the new payment would likely be, along with how much you would pay if the maximum interest rate on your loan were reached. Base whether or not you can afford the mortgage payment on that rate, instead of what you are paying at first.
Looking for the Right ARM
An ARM can be a great decision for some. However, it is important that you shop around for the right ARM, rather than just taking what any mortgage lender is handing out. Not only should you consider the ultimate affordability of the ARM, but you should also consider the following:
- Avoid an ARM with prepayment penalty. If you refinance, you could pay a big cost.
- Look for a more standard 5/1 or 7/1 ARM.
- Make sure there is a cap on the maximum rate charged on the loan.
- Clarify that you are not dealing with a teaser rate.
An ARM  can work out for a number of people. If you are looking for a way to save on interest, you can take advantage of low rates. Those looking for jumbo mortgages can als0 benefit. Because a huge loan has a higher principal, it is clear that a smaller interest rate, even if it only for five years, can save you a great deal of money. And, with interest rates on fixed rate mortgages creeping up, an ARM appears much more attractive — especially if you consider that some ARMs are hovering at around 4% right now.
(photo: revdancatt )