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xBRIANx's avatar

What do you guys think about an Adjustable Mortgage Rate (ARM)?

Asked by xBRIANx (242points) November 21st, 2011

For all you Adjustable Rate Mortgage skeptics… right now you can get a 5-year ARM at 2.50%. I know the biggest CON to this is that in 5 years, it may adjust to 6–10%. But what prevents me from just refinancing again at that time? Do we really think the economy is going to be “fixed” in 5 years and that 15, 20, or 30-year fixed rates are going to be that much higher, if any, than they are today? At this writing, a 30-year fixed is 4.125%.

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14 Answers

Neizvestnaya's avatar

Be very careful and know inside and out the terms of your ARM. I know people who had loans they thought they could refinance only to learn all they had to do was be late on one payment and their refinance option was voided.

gondwanalon's avatar

It looks like you have thought this through well and will be ready to refinance if the rates start edging back up in the future. Your plan sounds good to me.

I got an ARM on my house when rates were over 15% in the early 1980’s. People told me that I was crazy as the rates could keep going up. Of course I enjoyed a smooth ride ever downward in mortgage rates. That was the smartest/luckiest decision that I’ve made with my house.

wundayatta's avatar

An ARM is a bet on future mortgage rates. Would I take an arm now? Nope. I’d lock in a rate now, because when the economy gets better, rates will go up. If you think the economy is going to stay down for a long time, maybe you should bet on an ARM, but just remember, after five years, it will go up. Then again, you might still be able to get a good low 15 to 30 year mortgage at that point, as well.

We bought our house with an ARM. Just a three year one. Sure enough, it went up pretty significantly when the economy started to boom during the Clinton years. We refinanced for a lower rate 20 year mortgage. I think we refinanced again for a 15 year mortgage and finally for a home equity loan, all of which were lower rates, although we had to pay points each time. We own the house now, which is a good thing, although I don’t know what happened, because we seem to have as much spendable money as we did when we were still paying for the house.

Jaxk's avatar

My guess is, it will adjust to much more than 6–10%. That is assuming the economy recovers. Remember that interest rates are at an all time low. If the economy recovers, you will not see the 4% interest rates again. Historically a 6% interest rate is a good one. If we see the kind of inflation we saw at the end of the Carter administration you could see interest rates above 20%. It’s a risk I wouldn’t take. And just a reminder, all those folks that are losing thier homes from the sub-prime debacle, thought they could refinance when the interest rates adjusted. It didn’t work out that way.

flutherother's avatar

Interest rates can’t get any lower so you might as well lock into the low rates available now. It gives you peace of mind for the duration of the term. That peace of mind is itself worth something.

YARNLADY's avatar

If you are in a growing economy, where housing prices will increase, it is a good deal. You have to have a decent cap and it should be tied to a reasonable index, not too much fluctuation. However, the current economy and looking forward to the next 5 years is NOT a favorable one.

We were lucky in the 1980’s to get into a very good deal, by doing a lot of research and ended up actually making money with our first house. We rolled the basis over into a nicer, bigger house. We are now underwater with both our houses, but our credit is good enough to get our loans refinanced to lower interest and payments.

The current housing disaster was caused by too many denders using that kind of loan to sell houses to people who could not afford them, and then no one is able to refinance, hence thousands and thousands of foreclosures.

augustlan's avatar

Rates are so low right now, you’d be far better off getting a standard mortgage at these rates. They are unlikely to drop any lower, and by the time you want to refinance, will likely be higher.

ETpro's avatar

@Jaxk Once more, I find myself in complete agreement with you. This is definitely not the time to buy a home finances wtih an ARM. It’s not even likely, given the woes they brought the mortgage industry,m that you could even get such a loan now.

xBRIANx's avatar

@Jaxk, you said that “Remember that interest rates are at an all time low” and @flutherother, you said that “Interest rates can’t get any lower…” Funny thing is, I’ve been hearing those same two quote for the last 5 years. I’m betting on a weak ecomomy for the next 5 years, thus, I believe I’m betting on an ARM.

xBRIANx's avatar

@YARNLADY, you said, “the current economy and looking forward to the next 5 years is NOT a favorable one.” I agree with this statement, however I am not understanding your logic. You say that “If you are in a growing economy, where housing prices will increase, [an ARM] is a good deal.” But wouldn’t it be a BAD deal since in 5 years when I have to refinance again the rates will be MUCH higher since the economy is growing? Again, I’m betting on a weak economy for the next 5 years so that in 5 years I can refinance to a 30-year fixed at around 4.25%.

xBRIANx's avatar

@augustlan and @augustlan… again, I’ve heard these same statements for the last 5 years. Take a look at this line graph. In 2006, economists and brokers were saying we are at an ALL TIME LOW at 6.0% for a 30 year fixed. Then in 2007, again ALL TIME LOW at 5.5% for a 30 year fixed. 2008… same story: ALL TIME LOW at 5.0% for a 30 year fixed. 2009: 4.75% for a 30 year fixed. 2010: 4.5% for a 30 year fixed. Now… will then downward slope continue? Probably not. But I think it will level off for at least 5 years and then maybe start creeping up. I guess we’ll find out in 2016.

Any other different thoughts on this?

xBRIANx's avatar

Oops, forgot to post the mortgage rate trend link I mentioned in my previous post.

Jaxk's avatar

@xBRIANx

The Fed interest rate is at zero. It can’t go any lower than that. If you think it will stay there, then your making a good bet. It’s a bet I wouldn’t make, the odds are against you. Everything the government is doing is inflationary. Your graph shows a 3 year decline and you’re making a 30 year commitment on that. I wish you luck but you may want to look at a longer trend to get a better feel.

YARNLADY's avatar

An adjustable rate mortgage always starts below the market rate, to make it more attractive. When refinanced, it rises to the current market rate – but the problem in a poor economy is the base price of the house doesn’t rise enough to allow you to refinance, so you are stuck at the adjusted, higher rate and monthly payment.

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