Adjustable Rate Mortgages: Bad Reputation or a Misunderstood Mortgage Product?
It is no secret that interest rates are on the rise. The 30 day period between: June 1st through July 1st, 2013, was one of the biggest, if not THE most significant moves in the modern history of mortgage rates. For the better part of the past year the 30-year fixed interest-rate was so low, most people did not consider any other loan product than a 30-year fixed loan program.
With rising rates however, many home owners are now considering the monthly savings offered by Adjustable Rate Mortgages, or “ARM’s”. Unfortunately many people have some misconceptions about these loan products. Some people believe that Adjustable Rate Mortgages were the primary cause of the mortgage meltdown of 2008. This could not be further from the truth, as ARMs have been available for the past 25 years, and up until the expansion of the mortgage market, ARM’s had the same rate of default as a 30-year Fixed Mortgage.
Underwriting practices that provided mortgage loans to people with poor credit history, little or no down payment, and the inability to document income were among the primary causes of the mortgage meltdown 0f 2008. These underwriting practices are no longer available with any mortgage products.
Adjustable Rate Mortgage Myths:
“You can end up owing more than your original loan balance with an ARM.”
The only way that you can owe more than your original loan balance is if your loan has negative amortization. The only loan type that has negative amortization features is an option-arm. These loans have not been available since 2008. If you make your monthly payment on-time you will not have any negative amortization with any loan product.
“When an ARM loan becomes adjustable your payment can double without notice.”
All ARM loans are fixed for a very specific period of time during this period of time, you can refinance, sell or pay down any portion of principle that you would like without penalty. All ARM loans interest-rates after the fixed period are calculated by the addition of a fixed margin+ the current index that is related to the loan. Typically the 12 month Libor (London Interbank Offered Bank) when this index goes up, any loans tied to this index also go up if they are past their fixed rate period. The current LIBOR rate is at .69% one year ago this rate was calculated at 1.07%
All ARM loans have a maximum rate the loan can adjust each year and over the life of the loan.
Depending on how long you plan on staying in your home, an ARM could be a perfect loan product for you potentially saving you thousands of dollars in unnecessary interest.