I just don't get this. Why would someone even want a mortgage payment that is going to go up so much after a year or so. Do they really expect their salaries to go up so much? I think many people have these and it has contributed to all the homes on trustee sales after people got so far in debt. What do you guys think??

Trickie

Your mortgage payments go down when interest rates drop. If you're willing to take that gamble, an ARM could be advantageous.

Also, since you are accepting the risk that interest rates will climb, lenders offer you lower initial mortgage payments. So if you only plan to own a place for a short period of time, an ARM might be worth it.

ARM's are a viable product. You just hear alot of horror stories about them because many people don't understand them and got suckered into a bad deal.

There is a difference between a loan (that is an ARM) that is not a subprime loan and one that is. A prime loan with an ARM may be good if you know you will be living in the house less than the fixed rate period (3 or 5 years or whatever) because that rate is usually lower than the 30-year fixed rate. The plan would be to sell the house before a rate increase.

Prime ARMs usually can only go up or down a maximum of 2 percentage points a year after the initial fixed rate period and there is usually an overall rate cap of 5 or 6 percentage points up or down through the life of the loan. Those movements aren't arbitrarily picked, but rather are linked to some other rate such as LIBOR or 10-year treasuries. As some benchmark rate goes up or down, so does your rate in a once-per-year adjustment.

People didn't get far into debt because of prime ARMs. People got into debt because they bought a house that was more expensive than their means or their credit worthiness warranted. 5/1 ARMs should not be confused with interest-only loans and other creative packages they devised for the subprime market.

Do not feel bad for the people losing homes they could never afford... those homes are frequently the equivalent of stolen property. Oftentimes those people put no money down and utilized "no doc" loans (aka "liar loans") to get the keys with very little (if any) money down. The people you should feel sorry for are the taxpayers who will have to back these loan buybacks from the banks under the new legislation on the Hill now, not the thieves (no matter how well-meaning) that participated in causing this mess.

TRICKIE Wrote:
-------------------------------------------------------
> I just don't get this. Why would someone even
> want a mortgage payment that is going to go up so
> much after a year or so. Do they really expect
> their salaries to go up so much? I think many
> people have these and it has contributed to all
> the homes on trustee sales after people got so far
> in debt. What do you guys think??
>
> Trickie


I know some people who got ARMs during the boom. Usually the rationale was if they got the ARM they could qualify for the loan (stupid, I know). The mortgage brokers would always give them the same B.S. story, "Just before the rates adjust, refinance into a 30-year fixed or sell the house." Of course, when the value of the house drops 30% or more, you are technically underwater and the mortgage you need to refinance is more than the value of the house so, in the end, you still can't get the right loan.

TheMeeper Wrote:
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> Your mortgage payments go down when interest rates
> drop. If you're willing to take that gamble, an
> ARM could be advantageous.
>
>

Yeah, but when mortgage rates are at an historically low level (I believe 5.25 for a fixed rate at the height of the boom), getting an ARM was stupid.

I locked in at 5.5%, so an ARM was out of the question. In fact, I would have been insulted if my broker had even mentioned an ARM as an option!



WashingToneLocian Wrote:> Yeah, but when mortgage rates are at an
> historically low level (I believe 5.25 for a fixed
> rate at the height of the boom), getting an ARM
> was stupid.