ARMs Are Back, But Not “Evil”; When To Take an ARM?
The Wall Street Journal (WSJ) had an article today on the return of ARMs, or adjustable rate mortgages. About 1/3 of conforming borrowers took ARMs in late 2013, and over half of jumbo borrowers took ARMs. The WSJ blamed ARMs for the housing crisis of 2008, but those were far different ARMs and there were many other factors behind the housing crisis (no income verification, and no down payment requirements, to name a few).
Our point is that ARMs are not only not a bad thing, but they represent the best option for borrowers with shorter time-horizons. Buyers in small homes who are intent on starting or growing a family should consider ARMs. Buyers who know they will be transferred by their employer should consider ARMs. Very old borrowers should also consider ARMs. Finally, buyers with enough cash reserves to simply pay off their mortgages, should the ARM adjust too much, should also consider ARMs.
Today’s ARMs are much safer. Most are fixed for 5, 7 or 10 years (before becoming 6 month or 1 year adjustables); all require full income documentation; and all require substantial down payments.
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