ARM loans are something you may have heard a lot about right after the 2008 mortgage crisis. Although they have a bad reputation, they can be a smart mortgage strategy for the right borrower. ARM loans are known for their complex interest rate adjustments but have come a long way since 2008. Lending guidelines have become much stricter and ARM loans are reserved for those who truly benefit from them and not as a tool to buy homes out of their price range.
This article will help you understand exactly what an ARM loan is, the history behind them, and who is best suited for them.
What is the ARM Loan?
Opposite of the common FRM (Fixed-Rate Mortgage), an ARM (Adjustable Rate Mortgage) loan has an interest rate that changes with the market. An ARM loan will start with what is often a lower interest rate compared to FRM loans. This helps you get into your home at a much more affordable monthly payment and interest rate.
This rate will stay fixed for a certain period. This can range from 3 to 10 years. However, after that fixed period it will then adjust to the market interest rate. This comes with significant risk as nobody can predict what interest rates will do with 100% accuracy.
ARMS have a bad reputation in the mortgage industry due to their involvement in the 2008 mortgage crisis. Due to a lack of lending standards, many borrowers used ARMS to afford homes that were clearly out of their price range. This caused an enormous problem when many ARMS adjusted, and many homeowners were left with rising payments and dropping home values.
What Is The Positives and Negatives of ARM loans?
- Ties up less of borrower’s money if that they could invest in something that has a higher return on investment.
- Great for those who will be moving in a few years
- Payments could decrease if rates are lower during the adjustment period
- ARMS can include payment caps that stop too much of an adjustment from happening at once
- Cheaper initial interest rate means cheaper mortgage payments at the beginning of the loan
- Complex and complicated which can leave borrowers stuck in something they didn’t realize
- Borrower’s monthly payment could adjust to something higher than they can afford
- The borrower may pay more interest over the life of a loan due to the adjustment
- May provide the borrower with a false sense of security during the fixed-rate period
- The borrower will have to refinance out of loan if they are unhappy and pay a new set of closing costs
While ARM loans may not make sense for most, it can depend entirely on your unique situation. Spending time with a lender going over the numbers both long and short term is the best thing that you can do to find the right solution. Click here and schedule your free consultation to speak with one of our home loan experts.