Don’t Twist My ARM!

You know them, you’ve heard it in the news. Adjustable rate mortgages. With the rising rate of foreclosures, why would anyone want an ARM? That’s a good question with many different reasons. Personally, an ARM would be my last resort. Unfortunately, too many people are duped by lenders or their own lack of knowledge to know what is best for them.

An adustable rate mortgage, for those who don’t know, is a mortgage lending rate that is adjusted at specific intervals according to an economic index + other fees. This means that if interest rates rise, the ARM rate rises and so does your monthly payment on your home.

So why get an ARM instead of a fixed-rate mortgage? Well, ARM’s usually have lower interest rates, sometimes called “teaser” rates that appeal to many low-income people or people with low credit scores. They see it as a quick opportunity to buy a house and get that low payment.

Unfortunately what most people don’t see is that interest rates can and do rise. Below is an illustration of rates since January of 1992.

As you can see by the green line, the ARM was a good choice back in 2003. Rates were lower than fixed rate mortgages and the economy was doing well. Let’s do the math and see how much you paid for a home worth $200,000 in May of 2003 compared to a home in May of 2007.

Year and Type Rate Payment
2003 FRM 5.31% $1,112
2003 ARM 3.63% $913
2007 FRM 5.31% $1,112
2007 ARM 5.57% $1,144

If you have an ARM still, you somehow had to come up with an extra $232 per month to afford your monthly mortage payments. That’s $2,784 per year extra on your housing payments. You could therefore see why it’d be hard for low-income families to come up with the extra money to be able to make these kinds of payments.