Mortgage borrowers have received a call to arms lately -- or
rather, a call to ARMs, or adjustable-rate mortgages.
Unfortunately, for many people, this increasingly popular variety
of loan just isn't the best choice.
Nuts and bolts
Mortgages come in two main flavors, bearing either fixed or
adjustable rates. The interest you pay on a fixed-rate mortgage
stays the same for the life of the loan. If you lock in a low rate,
you're set for decades, and you'll always know how much to pay each
ARMs fix their rates for an initial period, but then begin to
adjust the interest they charge according to prevailing rates. A
cap usually limits how much rates can rise with each increase, but
over time, interest can grow substantially, leaving borrowers on
the hook for ever-steeper payments.
To see why people will gravitate toward ARMs, check out recent
mortgage rates from
, below. (All feature no points paid.)
Type of Mortgage
|30-year fixed-rate mortgage
|15-year fixed-rate mortgage
|3/1 ARM (fixed for three years, then adjusting)
|5/1 ARM (fixed for five years, then adjusting)
Source: US Bancorp, as of March 25.
The lower rates for the ARMs mean lower initial monthly mortgage
payments, which can make a big difference for borrowers trying to
afford a certain home
Adjustable-rate mortgages have been cited as a contributor to
the recent housing crisis; many troublesome subprime loans were
ARMs, sold to unsavvy borrowers. Indeed, some lenders are still
digging out from that mess. In October,
) struck a deal with many states, agreeing to forfeit hundreds of
millions of dollars to settle claims that the company's mortgage
subsidiaries may have deceptively marketed extra-risky ARMs.
In recent years, ARMs had fallen out of favor. But now
the mortgage scene is changing
, and ARMs are back. At
Bank of America
) , sales of ARMs recently doubled year over year; overall, ARMs
now make up 10% of home loans. For context, in 1994, when
fixed-rate 30-year loans had average interest rates between 7% and
9%, ARMs accounted for 70% of all mortgages nationwide.
If you're in the market for a mortgage, deliberate carefully
between fixed-rate and adjustable-rate loans. The ARM can bite you
if rates rise -- and after lingering near historic lows for years,
rates most certainly will increase. Still,
low rates may persist
for several more years, and if you don't plan to stay in your home
much longer than that, an ARM can make good sense.
Keep your eye on major mortgage lenders by adding them to your
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