According to an article in the New York Times, Adjustable Rate Mortgages (ARMs) are on the rise. ARMs played a big part in the housing market collapse and many are questioning their return to the market.
These particular mortgages start out with what some might refer to as a “teaser” interest rate, then later on adjust up. During the housing market boom, as many as 70 percent of homes were mortgaged with an ARM, some adjusting upwards just a few months after closing. The main problem with these mortgages was many people who opted for them bought houses outside their means and when the rates adjusted, couldn’t make their payments.
When the housing market collapsed, so did the ARMs. In April 2010 only about 4 percent of new home loans were financed with these mortgage packages. Today, that figure is on the rise. According to the article, Bank of America made twice as many home loans with ARMs this February than it did just a year ago and many think the overall rate of these mortgages will hit close to 10 percent by year’s end.
So the question is: Are these loans safe today and should banks be making them? The answer is of course open to debate, but there are some new safeguards in place that might make the loans more stable.
First, there is new criteria recipients of the loans must meet.
“An adjustable now is basically a prime product,” said Michael Moskowitz, President of Equity Now, a lender in New York. “There’s definitely a comeback in their popularity.”
New requirements for ARM approval makes these loans harder to come by. In order to qualify the loan recipient must be approved in one of two ways to ensure they will be able to keep up with payments once the loan has adjusted. Lenders can either qualify the loan candidate by approving them for their starting interest rate plus 2 percent, or approve them for the full index rate, whichever is higher at the time of approval.
According to the article, most people who look to get an ARM are those who are purchasing homes which require a large mortgage, commonly referred to as a jumbo mortgage. These loans tend to come with higher interest rates to begin with and an ARM can save the home buyer thousands of dollars in just the first couple of years.
A final point to note is that ARMs today tend to be for a longer term than in the past. Most ARMs being issued are 5 to 1 or 7 to 1, meaning they won’t adjust for 5 or 7 years. Very often, home owners look to remortgage or plan to move within these more conservative time frames.