Adjustable Rate Mortgages

When I was a younger I was warned, “Never buy an annuity.” But, many years later, after becoming involved in the financial services industry, I watched as annuities underwent dramatic improvements in structure. They were reinvented into much safer and productive investment devices; and, now that old cautionary saw about avoiding them is rarely heard.

The Adjustable Rate Mortgage (ARM) has had a similar history, so, some of it bears retelling. ARM loans first became available to residential borrowers around 1980, or so. It was a time of high interest rates and the banking and real estate industries needed a better way to provide residential funding. That better way came to be known as the adjustable rate mortgage. There was much excitement, especially among real restate brokers who were having trouble selling homes in the strong interest rate market, and were ballyhooed by lenders as better than sliced bread. There were structural problems, however, mostly having to do with annual adjustment caps, life-of-loan adjustment caps and prepayment penalties. If asked, I would – and did - caution any potential borrower to avoid using an ARM.

The years have sped by and now, after 25 years, ARMs, too, have been reinvented to correct the problems inherent in their original forms. ARM loans are now a perfectly suitable and time-tested loan vehicle for many borrowers and circumstances. In truth, the ARM does not replace the fixed-rate loan; instead, the ARM has become another tool available to borrowers to help make their home purchase or refinance work as efficiently as possible within the borrowers’ situation. There are some cautionary considerations, which I have spoken about in my article entitled, “How Much Home Can I Afford.” Read about it at (insert URL here).