Back in the real estate "boom" days, using an adjustable rate mortgage seemed like a clever idea. Those looking for the lowest interest rates possible and even those who planned on only owning their home until the ARM's readjustment period were all willing and eager to sign on the dotted line.
Fast forward to 2008, when the the foreclosure rate skyrocket to 75 percent and the hot real estate market came to a screeching halt. 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 consumers first start their mortgage research process, adjustable rate mortgages can be a huge money saver. Financial lenders offer borrowers introductory interest rates that are 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.
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. The areas ofLas Vegas, West Palm Beach, Miami and Phoenix experienced the largest proportion of both and thus according to the FDIC was the heart of declining home values. According to the FDIC "In 2008,these states held 46 percent of the prime ARMsoutstanding nationwide and 64 percent of foreclosuresstarted within this mortgage category."
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.
If you are currently in an ARM, take the opportunity to research fixed mortgage rate opportunities at www.gobankingrates.com
