ARMs Coming Back Into The Picture

   With the recent upswing in the mortgage rates, the option of an ARM is starting to be explored a lot more with current borrowers. The mortgage rates recently spiked, going from 3.5% in April to over 4.5% as of now in late July which is having a significant impact on peoples' buying power. I know that a few of my clients just recently had to lower their price range by 10 to 20 thousand in order to adjust to the rates. At the same time the 30-year fixed rates are experiencing this small surge, ARMs have been keeping fairly steady, fluctuating between 2.7% and 3.1%. Yes, those rates look very appealing right now; but at what cost? For those of you who do not know what an ARM is, I will explain. ARM stands for "adjustable rate mortgage" which means exactly what is says; the rate is not locked in for the length of the mortgage and periodically adjusts according to an index that reflects the cost of the lender to borrowing on the credit markets. This closer focus by borrowers on ARMs is starting to get some people nervous, but why?
     Well, ARMs are often accused of having a hand in causing the housing bubble. Their low rates and low initial payments are very appealing, HOWEVER that is not the whole picture. You are assuming a hefty risk when entering into an ARM and you need to be prepared for the future. Prior to the housing bubble many home buyers went with an ARM and once the higher reset payments went into effect many were forced to default on their loan. In recent years, fixed rate mortgages have reached record lows, staying steady at 3-3.5%. With rates like that in fixed rate mortgages, it didn't make sense to take on the risk of an ARM, but now with the recent spike, ARMs are back in the spotlight. Earlier this month, the share of ARM activity jumped to its highest level in 5 years (since July 2008, according to the mortgage bankers association.)
     ARMs are based off short term interest rates which are still seeing numbers near record lows. Although, economists are expecting to see an increase in these short term rates fairly soon. Borrowers choosing an ARM will be able to purchase a more expensive home then if they were to go with a fixed rate mortgage, but at what cost? If the monthly payments rise to much because of the variable interest rates, it would be like digging yourself into a hole that you eventually cannot climb out of. The purpose of me writing this is not to scare you away from ARMs as it may be the right choice for you. Just keep yourself informed and make sure you consult with a mortgage expert before jumping into something you may not completely understand.