A return to ARMs

Date posted: July 12, 2011

Financing the purchase of a home has become much more of a challenge today than it was 5 or 10 years ago. But one element of this process seems to be coming back around, and that’s the use of ARMs, or adjustable rate mortgages. Is this a good thing? N.C. State University economist Mike Walden responds.

“ARMs almost disappeared during the last couple of years as we saw a big retreat in the housing market, and many people who had taken out adjustable rate mortgages in the mid-part of the last decade, when rates went up, they got burned.

“But now we’re beginning to see the popularity of ARMs come back, and I think a big reason is that with an ARM you can get in on that house, you can get on that mortgage at a much lower rate. In fact, right now the initial rate on an ARM mortgage would be about one percentage point under that of a fixed rate mortgage.

“And so as the housing market at least for some begins to rekindle, some folks are choosing to take out those adjustable rate mortgages. But again, you need to be cautious. You need to realize that you’re not taking a fixed-rate mortgage. That ARM rate can go up.

“One thing I always recommend people do is run a worst-case scenario — say, alright, if the rate goes up, the maximum it can over the time period it can, can I be able to afford that higher payment? That’s one thing that people got in trouble with 5 to 10 years ago.

“So, if you go into this process, I think, fully informed and understand the consequences, certainly an ARM rate fits some people. But I think the key is getting that information for yourself.”

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