Why It's Time for Buyers to Reconsider an ARM
NEW YORK (TheStreet) -- Adjustable-rate mortgages have been in the doghouse for years, shunned by borrowers who heard horror stories about homeowners whose ARM rates soared in the '00s, driving monthly mortgage payments through the roof. On Wednesday the Mortgage Bankers Association reported that only 4% of mortgage applicants were seeking ARMs.
But maybe it's time to reconsider. For some borrowers, an ARM can be cheaper than a fixed-rate mortgage. Also, ARM rates are enticingly low right now but could rise as the economy improves. Annual and lifetime caps based on today's low starting rates would prevent a borrower's future ARM rates from going too high.
As the name implies, an adjustable-rate mortgage has a floating interest rate. Typically, it starts out low -- lower than you'd pay on a fixed-rate loan that charges the same rate for its lifetime. After an initial period of one to 10 years, the ARM rate adjusts every 12 months. The new rate is figured by adding a "margin," such as 2.75 percentage points, to an index such as the rate paid by a specific bond.
The borrower saves money by paying a lower rate in the initial period than on a fixed-rate loan. But there is a risk the ARM rate will someday go higher than the borrower would have paid with a fixed-rate deal. In the past few years, rates on 15- and 30-year fixed-rate loans have been so low that most borrowers figured it was better to lock in a fixed rate than take chances on an adjustable one.So why look at ARMs now? Mainly because ARM rates are likely to rise, so that today's ARM is probably a better deal than the one you might get in a year or two. ARMs come with caps that typically prevent future adjustments from rising more than 2 percentage points a year, or 5 or 6 points over the loan's life. If you start at an exceptionally low rate today, like the 2.7% average for five-year ARMs, you'll never pay more than 8.7%, which is not especially high by historical standards.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV