Despite rising mortgage rates, ARMs are worth a lookby Tim Manni
While currently hovering around 6 percent of total applications, according to the Mortgage Bankers Association, reports are that Hybrid ARMs are making a comeback in the face of rising mortgage rates.
When you ask mortgage lenders and brokers what is the most common question borrowers ask, the response is simply, “What’s it going to cost me?”
Well, to help defray the costs of rising mortgage rates, more and more mortgage professionals are suggesting Hybrid ARMs—where the loan’s interest rate is fixed for given number of years, typically five, seven or even 10 years, and then adjusts each year after that.
You might be saying, “I thought it doesn’t make sense to take on an adjustable-rate mortgage in the face of rising rates.” While you’re right in the traditional sense, the interest-rate spread between ARMs and 30-year fixed-rate loans has grown wider recently, making the adjusting option cheaper and somewhat less risky.
Downside of ARMs
Of course, the downside of Hybrid ARMs is obvious: you simply don’t know what your interest rate will be by the time the fixed-rate period ends.
For those ARM borrowers out there who are concerned about the potential cost increase when your interest rate resets, try this: put aside the money you’re saving each month with your lower, adjustable-rate mortgage, and when it comes time for your rate to reset, you’ll have a pool of money on hand to help alleviate any cost increases.
Not so dangerous anymore
Currently, ARM applications might only be at 6 percent of all mortgage applications because many borrowers still have a bad taste in their mouths regarding ARMs and their role in contributing to the mortgage crisis.
But a lot has changed in just a few years. Not only are lending standards far more strict, the risky, and what some might even describe as “toxic,” portions of certain ARM products have been removed. In particular, I’m talking about the interest-only and balloon payment portions of the program.
But back in 2010, HSH.com Vice President Keith Gumbinger created a four-part document detailing why ARMs are neither “evil” nor “toxic” and why they are a valuable mortgage product for the right customer in the right situation. The advice in that article, now some three years old, still holds true today.
So, even though mortgage rates are rising, don’t go blindly into the “plain vanilla” 30-year fixed without researching all your options first. You never know, an ARM might be right for you.