The ARM is back: Should you bite?

Traditional ARM products were not the culprits behind the financial debacle. Rather, one of the main problems was a special type of ARM, better know as an Option ARM or Pick-a-Payment loan. This product was designed for real estate investors/flippers who have very short term financing needs. However, the product was abused and marketed to the average Jane and Joe as an affordable way to purchase a home or long-term investment property. This worked because one of the payment four payment options is to pay less than what is owed to keep up with the interest, resulting in an increasing principal balance. The other three payment options that borrowers could choose each month would be a full interest-only payment, a principal and interest payment based on a 30 year term or a principal and interest payment based on a 15 year term.

The coup de grace with Pick-a-Pay loans is that lenders allowed the principal balance to balloon to 115-120% of the original loan balance before an adjustment triggered an elimination of the lowest payment option, forcing you to pay at least the full amount of interest due per month.  Combine this with the rapidly declining market values of property and a perfect storm was brewed where borrowers could not refinance their upwardly adjusting Pick-a-Pay loan into a traditional ARM or Fixed rate mortgage, no matter how good their credit score was.

The truth is that borrowers who chose a traditional ARM during the 2004-2007 range are enjoying dramatically lower interest rates on their ARM today. The rate for an ARM is based upon an index.  One popular index that lenders use is the LIBOR (London InterBank Offered Rate). As bad as the U.S. economy has been, those of most European countries has been worse. Interest rates are just as low across the pond, if not lower, than in the U.S.  Good credit borrowers who did a 5/1 ARM in 2005 for example, probably started at a rate around 6% and their mortgage adjusted within the last year. Did the rate go up? Not even close.  These borrowers are now enjoying rates around 3% - a major windfall of monthly cash flow which can be used to pay down higher interest debt, mortgage principal reduction, or boost emergency savings accounts or nest egg contributions.

When interest rates start rising (and they will), ARMs have caps to protect you from too big of a payment increase at any one time. The max adjustment is typically 2%. For example, if you did a 5/1 ARM in 2005 at 6%, you are probably paying about 3% today and if rates skyrocket, the worse case scenario for your next mortgage rate adjustment would be up to 5%, still lower than where you started.  This gives you time to prepare for a refinance into a historically low Fixed mortgage if you expect to stay in your propety for the long term.

The correct mortgage product for you is primarily driven by one thing - how long you expect to own a property. In fact, if this is not one of the very first questions a mortgage originator asks you, I'd seriously consider shopping around for another licensed originator. Once you can ballpark an answer to that question, a good, licensed mortgage professional can provide you more intelligent options based on your personal situation. Asking friends or relatives for their advice? Not so much. You would not think to get tax advice or legal advice from them, nor should you rely upon advice from them about the single largest financial transaction you will probably make in your lifetime. Best to keep business spearate from friends and family and rely upon licensed experts for guidance in these matters.

Unbelievable, haven't people learned anything yet.  There's an idiot born every second.

author gives every explanation in the book for what happened.

consumers never planned to keep paying on ARM"s after they adjusted. nor did most ARM borrowers plan to sell when the ARM adjusted, that's poppycock. Most ARM borrowers were aware of how high up their payments could go... but they assumed, were even coached by lenders, that they could simply refinance into a fixed rate when the ARM adjusted too much..

Only hitch... you need equity in your home to refinance...No equity. No refinance....

Also many borrowers knew that payment cap loans could go into negative financing.

Everyone likes to play the consumer dumb... and the evil banks and government... When the truth is many homeowners were speculating in the rising home market, one way or another, during the boom years.... Like investors. It's called greed and failing to look at the downside... a falling home market.... .And when the bust finally came it was the blame game because nobody wanted to take the losses....

 

I mean give me a break. The American consumer is not a dumb consumer. Whether it be cars, clothing, houses or what. Ameri

Did we learn nothing during the last 6 years? There was a cartoon in the paper in 1987, showing Indiana Jones signing the mortgage to his "temple of doom". It was an adjustable rate loan. I vowed never to sign one. Never have, never will! The sellers of such loans are the equivelant of the "money changers", which Jesus drove from the temple! Poor and middle clas people are usually the victims in this, and must not be taken in again!

One in three mortgage holders have no or negative equity in their homes. In 2 more years it will be closer to one in two because the shadow inventory the banks are sitting on is enormous. Prices MUST come down. The banks fooled the people once...shame on the banks. Fool the people twice, shame on us.

Straight or option ARMs are toxic loan products. Beware !!

Used to be the two things you could always count on were taxes and death, well you can always count on the price of everything around you going up except your paycheck.  That is the way the banks and mortgage lenders sucker punched people into taking out those kind of mortgages.  The rates would go up, as your earning potential did.  Big joke!  Nobodys laughing...

bank and fianance at it again i guess the need there bounus again taxpayer going to bail them out again you betlie cheat steal way to go great being an american rip off anyone you can take the money and run

With interest rates still at record lows why would anyone in their right mind consider an Adjustable Rate Mortgage, Yes they have risen some but they are no where near the peak interest rates of the late 70's early 80's some above 16%, Fixed rate loans nowadays range in the 5% and some even lower range,

 

People need to do a little research before they sign any loan document, Quit blaming banks and realtors for your mistake. They are in business to make money and are not your friend, They are simply doing business as usual.

The facts are: 1. banks are trying to do away with 30 year mortgages, 2. ARMs were not the problem, it was negative ammortization and fraud by some borrowers and most of the banks and wall street that created the problem. It is amazing that we are allowing the banks to do the same things they did to create the great depression in the 1930s do it all over again. They created the depression by investing in the stock market, they created 5 year ARMs, they paid off Congress, they took nearly half of the homes people owned and there was massive wealth redistribution. Thanks to Phil Gramm, Chris Dodd, Barney Frank and the current Congress we have the same senario all over again. The only thing that is different is now there are 18 million unemployed who are armed to the teeth.