ARM mortgages have gotten a bad name recently and are often unjustly blamed for the housing bust, however buyers should not automatically dismiss all ARMs.
Hybrid ARMs can be really good deals even in these times of historically low interest rates, some lending experts insist.
In the first week of July, 2009, starting rates for ARMs were at 4 percent, generally a full percentage point lower than traditional, 30-year, fixed-rate mortgages. Hybrids are locked in at that starting rate for five, seven, or sometimes even 10 years, then they adjust—usually a maximum of 2 points a year with an overall cap of 6 or 8 points.
Savings on a hybrid ARM can be thousands of dollars and make sense for a buyer who does not expect to be in a home for more than five or six years – must sell BEFORE the rates adjust.
Buyers should do the math, considering the worst-case scenario. In many cases, particularly with jumbo loans, the savings can be substantial for short-term borrowers.
There is an important distinction between fixed-rate and adjustable-rate mortgages that few borrowers consider. When borrowers make fixed extra payments to principal on a fixed rate mortgage, they shorten the term but don’t change the payment. When they make fixed extra payments to principal on an ARM, they reduce the payment on rate adjustment dates, but don’t change the term. This makes ARMs attractive to those who want to reduce their payments, and FRMs attractive to those who want to shorten their term.
More about risks and benefits of Adjustable Rate Mortgages
Source: United Features Syndicate
