Adjustable Rate Mortgages/Moving Parts, Something New in all the World

The big thing about mortgage lending up until the advent of the ARM was that mortgages had no moving parts. Everything about them was stable; the interest rate was stable, the monthly payment was stable and the term – years to completion was stable, too. And, it was the long-term stability of the fixed-rate mortgage that was making its cost - interest rate - so high in the market of that time.

So, here’s the theory. If we can convert the mortgage rate commitment from long term to short term, then the loan interest rate could be pegged to a short-term rate or index (say the 1-year Treasury Constant Maturity Index). Read that again. Make sure you’ve got it. Such a development would make long-term loans available at something like short-term rates – at least in the early years of the loan. This is a good thing.