The Adjustable Rate Mortgage (ARM) had a bad wrap for many years and it nearly disappeared from lending after the 2008 housing market crash. Apparently, time heals all wounds since it now sounds like the ARM might be making a comeback. In recent years, we’ve witnessed a perfect storm of skyrocketing home prices, historically low inventory, and, more recently, a sharp uptick in interest rates. This combination has created a challenging environment for homebuyers, particularly those entering the market for the first time. The ARM offers a potential temporary solution.
ARMs offer an initial period of lower interest rates, typically lasting 3, 5, 7, or 10 years, after which the rate adjusts periodically based on market conditions. This structure can translate to significantly lower monthly payments in the early years of the loan, making it possible for buyers to qualify for more expensive homes or simply to get their foot in the door of homeownership.
The Risks and Controversies
The interest rate on an ARM can change at regular intervals after the introductory rate period ends.
The rate can increase, which can lead to higher monthly payments.
The rate can decrease, but it's impossible to predict the future.
Your loan might experience negative amortization since the monthly payments might not be enough to cover the interest, so the unpaid interest is added to the principal.
While ARMs offer a potential pathway to homeownership for some buyers, they also come with risks that must be carefully considered. It’s important that you fully understand the terms of your mortgage and weigh the risk and rewards. As the market continues to evolve, it will be interesting to see how ARMs and other financial products adapt to meet the needs of homebuyers in an ever-changing landscape.
