ARM Loans Make a Comeback. Are They Right for You?

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By Brian O'Connell

NEW YORK -- Adjustable rate mortgages, the bane of consumer advocates and the trap door for hundreds of thousands of homeowners who saw their mortgage payments rise in the heat of the Great Recession, are staging a comeback.

"Now there are signs that adjustable rate mortgages, which faded out of sight a few years ago, may be achieving a new life of sorts," says Michael Moskowitz, president of Equity Now, a direct mortgage lender in New York. "Some borrowers see them as a way to save money and to make it easier to qualify for a mortgage."

Mostly, ARMs are rallying around larger mortgages. The Wall Street Journal reports that ARMs comprised 22 percent of all mortgages between $417,000 and $1 million in 2013, but that rate jumped to 31 percent in 2014, and continues to climb.

Moskowitz says adjustable rate mortgages work best if you only plan to live in a home for a short period of time. In that case, an ARM is worth it.

"If you have a choice between a 30-year fixed loan at 3.82 percent and a hybrid 5/1 ARM, which stays fixed for five years, at 3.32 percent, the savings over the first five years can save big bucks on mortgage payments," Moskowitz says.

Those who may want to consider ARMs include those who work for a company that moves people around every five years or so or those who are planning to sell their home in five years and move to Florida, he adds.

Mortgage lenders also have done a decent job of improving ARM loans, some experts say.

"ARMs have been unjustly blamed for the meltdown, although there were some truly toxic varieties that have since gone thankfully extinct," says Joe Parsons, managing partner at PFS Funding, a mortgage banking firm located in Dublin, California. "For example, today's ARM -- especially the intermediate term, or 'hybrid' variety -- can be a powerful tool for certain homeowners."

Parsons explains why.

First, the rate is significantly lower than for an equivalent fixed rate loan, he says. "A five-year ARM, for example would have a rate of 3.625 percent, where an equivalent 30-year fixed loan would be at 4.125 percent," he says. "For a $300,000 loan, the five-year ARM would have a payment of $1,368, where the 30-year fixed would be $1,454 -- a difference of $86 a month."

ARMs also carry limitations for the way and amount they can adjust when the fixed period ends.

"Typically, the adjustments are limited to 2 percent in any given year," Parsons notes. "Loans adjusting today would carry a rate below 3 percent, although that figure will certainly change as the loan indices change. For a buyer intending to remain in a home for a predetermined length of time, that borrower could still save a great deal of money with very little risk."

Still, as long as the Federal Reserve keeps interest rates low, the mantra for mortgage borrowers may well be "safety first."

"ARMS really are great for short periods but fixed mortgage rates provide security and, except for last year, fixed rates are at their lowest levels since the 1800's," notes Ken Maes, Northwest divisional vice president of Oregon-based Skyline Home Loans.

%VIRTUAL-pullquote-Adjustable rate mortgages may be an acceptable option for sophisticated consumers who have the ability to take action if rates rise.%Other mortgage experts support that sentiment.

"Adjustable rate mortgages may be an acceptable option for sophisticated consumers who have the ability to take action if rates rise," says Kevin Stein, associate director of the California Reinvestment Coalition. "But for your average homebuyer, we'd strongly caution against getting locked into an ARM loan where you don't have control over the interest rate."

If and when interest rates rise, your monthly housing expenses will also rise, which translates to having to cut your expenses elsewhere (if you can) or increase your income -- a difficult proposition in today's economy, he adds.

Plus, if you think you simply refinance to a lower mortgage loan rate when the ARM ate triggers upward, think again.
"People may think or be told they can always refinance later when the rate goes up, but there is no guarantee that rates will be lower when a refinance is needed, and refinance loans usually come with some additional cost to the borrower," says Stein.

Bottomline: So there you have it, mortgage consumers -- adjustable rate mortgages are edging back into the spotlight, and that could be good news or bad news, depending on how you use them.
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