How ARMs Work & Why They’re Not Evil

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You hear about it often, avoid ARMs. Or, whatever you do – do NOT get an ARM. Usually this phrase is followed by: people have lost their homes due to ARMs. You also hear about foreclosures and short sales, which add to the fear of the mysterious ARM that somehow causes all of this. But what are ARMs? How do they work? Why do they have this often negative reputation? And lastly, should you get an ARM?

People often fear what they are unclear about. So I’m going to explain all the pros and cons with ARMs. Like all types of mortgages, ARMs are great for one group of people and horrible for the next group. Contrary to popular belief, lenders don’t want you to get an ARM if you’re part of the wrong group of people because a foreclosure hurts everyone in the end.

What is an ARM?

ARM stands for Adjustable Rate Mortgage. And just like the name suggests, the rate will adjust. Now, this is not quite as scary as many people believe. After all, interest rates fluctuate daily. And we deal with interest rates on many different levels, whether by loans, credit cards, or even on a global level with stocks, bonds, and notes. So why are people so afraid of this type of adjustment? The simple answer – because a lot of people didn’t expect this adjustment.

If you sign on for an adjustable mortgage, and didn’t realize it would adjust, then it becomes really scary when your mortgage payment is going up each month with the current interest rates. This is how people can no longer afford their mortgages.
What is far more comfortable to people is the fixed mortgage. You can get a 30-year fixed or 15-year fixed. Of course when you get this loan, the interest rate will never change over the life of the loan.

So then why would anyone get an ARM?

Answer: because you can save thousands of dollars.
Remember when I said ARMs are great for one group? Well here’s what the group looks like:
-You don’t plan on staying in your home for more than 5 years.
-You love watching the stock market, enjoy playing with investments, and keep up with the housing market changes to make wise financial decisions.
-You’re prepared for adjustments, and are comfortable with fluctuating mortgage payments.

Why would all of these things matter? Well, a 5-year ARM has a fixed mortgage rate for the first 5 years. So if you don’t plan on staying in your home for longer than that anyways, then you could sell the home long before your ARM begins adjusting. The benefit is that you get locked in at a much lower interest rate with an ARM than you do a fixed mortgage generally. And if you plan on either refinancing or selling the home within 5 years – who cares if it adjusts after 5 years?

Secondly, if you are financially savvy, and watch the market on a regular basis, you would know when interest rates are adjusting up. As soon as you see this happen, you can always refinance into a fixed mortgage.

Now, if you’re part of the group that doesn’t want to worry about finances, nor are you interested in the market, then a fixed mortgage is probably more suited for your needs. ARMs also do not just adjust up continuously. If mortgage rates are low, then ARMs also adjust down. It just all depends on how comfortable you are with investments and fluctuating interest rates.

Regardless of which type of loan you choose, it’s good to know exactly what each type of loan can offer. Having full knowledge and awareness will help you make the most educated decision in buying a home. So don’t shy away from ARMs, but rather evaluate what is financially the right option for you and your family.

Related Information:

• Get more info about buying your own historic home from In-House Realty.
• Get started buying a home with the Quicken Loans Home Buying Center.
• Get started refinancing your mortgage with the Quicken Loans Home Refinance Center.

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