Why Not A Sexy ARM? Here’s Why
Everyone wants them. They are attractive, confidence-boosting, and something to talk 
about. Those who get them, talk about them to everyone. ARMs (adjustable rate mortgages). Why ARMs? In general they have lower interest rates than fixed rate products, and, sometimes, much lower rates.
Not too long ago borrowers with perfect risk factors were getting 3-year ARMs for 4.00%! And so a principal and interest payment on, say, a $300,000 loan would be $1,432.25. Now, those borrowers would be at around 5.875% and the payment would be $1,774.61. That’s a difference of $342.36. Big difference. Big problem now also because anyone who chose that 3-year ARM three years ago and has not refinanced or sold the property has a huge adjustment in payment coming up.
“I am shopping around and am looking for the best rate,” is the most common statement that someone makes to a loan officer. As I emphasize over and over, the best rate is relative to many factors.
There has been great focus on the subprime collapse, and several people have noted how many people who took very short-term ARMs with a subprime loan could be facing catastrophic payment problems soon, as the rate will be increasing significantly. People with subprime loans who started at 6.00% two or three years ago may be adjusting to 9.00% or higher now.
And as I noted above, even many strong (A paper) borrowers who were able to get “sexy,” extremely low rates, three years ago, and were able to save a considerable amount of money monthly, and never sold their home or refinanced, also now may be facing much higher payments.
Things change. So do ARMS. So you have to ask yourself: what’s more important? A lower (temporary) payment with an ARM, or long-term rate/payment protection and slightly higher rate/payment (with a fixed rate mortgage)? Three years ago borrowers could have chosen a fixed rate at (say) 5.375%. Yes, the payment would have been higher than that sexy 3-year ARM, but the fixed rate would look real sexy now.
(Note: that is not my arm but a photo of what it will look like in about a year after my newly imposed workout schedule kicks in. I hope.)
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