The Return of the Dreaded ARM Home Loan


 

The ARM, or Adjustable Rate Mortgage, has a very bad name. During the height the good times, nearly 70 percent of the mortgages granted were ARMs. After things went sour, ARMs plummeted in popularity, getting only 3 percent of the total mortgages granted during 2009. Experts predict that they will make a comeback and reach 10 percent of the total for the year by December 2011. Nothing has changed about the basic idea of an ARM, but some of the factors involved have changed.

The Adjustable Rate Mortgage is defined by a loan that has a low, introductory rate for a set number of years in the beginning, and then is readjusted after this given time. For example, a 5/1 ARM would have a low interest rate for the first five years, and then it would readjust at that time. Each year after that, it would be up for readjustment on its anniversary.

The ARM is adjusted according to an agreed upon index, such as the 12-month Treasure Average Index (MTA) or the Constant Maturity Treasury (CMT). Since these indices are the same for everyone, no homeowner is treated unfairly in the adjustments.

The best reason to get an ARM is if the homeowner is going to stay in the home for just a few years. Especially if the homeowner plans to move before the initial discount rate period is over, the ARM is an excellent deal. The homeowner can literally save hundreds of dollars per month on his mortgage over the course of that initial period.

The problem that happened in the past was that too many people were granted ARMs on the basis of incomes that would allow them to make the payment during the initial period, but not when the payment went up with adjustment. When housing slowed, these people could not sell their homes when they wanted to, and they were stuck in ARMs that were rising beyond their means.

Another problem was that many of the people who were granted ARMs in the past were not screened very well for credit history. A very low credit score would allow an individual to purchase a home with an ARM. These homeowners, not surprisingly, defaulted at a high rate.

There are a few differences now. First of all, the requirements for mortgage lending have become increasingly tighter. People who could have gotten an ARM to finance a home in the past no longer qualify for any mainstream mortgages. They do not qualify if their income will not withstand a jump in the rates, and they will not qualify if their credit score is not adequate. Also, buyers are required to put down substantial down payments before the lenders will consider them. It is no longer common to get a mortgage with no money down.

The dreaded ARM might be returning, to a certain extent, but it does not appear likely that it will be a disaster as it was before. Rather, it will be an inexpensive alternative for people who do not want to get locked into a higher rate of interest when they only plan to hold onto their homes for a short time. Assuming the sales begin to increase again, that might be a much more reasonable bet than it was in the past.

Category: ARM loan

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