Back in the real estate “boom” days, using an adjustable rate mortgage seemed like a clever idea. Home buyers looking for the lowest interest rates possible, and even those who planned on only owning their home until the ARM rate readjusted, were all willing and eager to sign on the dotted line.
Fast forward to 2008, when the the foreclosure rate skyrocketed to 75 percent and the hot real estate market came to a screeching halt. Many homeowners found themselves unable to handle their ARM mortgages. Part of this catastrophe was fed by the jumps in interest rates during the readjustment periods of adjustable rate mortgages.
The Temptation of Adjustable Rate Mortgages
When borrowers first start their mortgage research process, ARM mortgages can be a huge money saver. Lenders offer borrowers an initial ARM interest rate lower then the national average. The reason is the borrowers, not the bank, are assuming that the interest rates are going to fluctuate and will then either reap the rewards of an interest rate cut or have to come up with the additional resources to pay the increased amount later.
ARMs and Sub-Prime Mortgages
While the boom years were occurring new home construction was moving at a quickened pace and lenders were approving large quantities of sub-prime mortgages. Many of the mortgages were of the adjustable rate mortgage variety.
That high default rate could be attributed to the change in rates that are naturally part of the adjustable rate mortgage structure. Many of those homeowners experienced their undoing due to spikes in interest rates that they were not financially prepared to take.
The Damage Done
For those home buyers who played a game of chance and hoped that their ARMs would drop, the damage has already been done.
However, the good news is that those who are up-to-date on their adjustable rate mortgages are now benefiting from the lowest historic interest rates in decades and so are those who are refinancing their mortgages. Before you commit to any loan, thoroughly research your options to be sure you can really afford whatever you choose.