Adjustable Rate Mortgages (ARM's) Still Have a Purpose

Recently, I recommended one of my customers close on an Adjustable Rate Mortgage (ARM) and they will save approximately $30,000 over a similar fixed rate loan. I don’t recommend ARM loans for most borrowers, but there are still instances where it saves customer’s money and may be their best option.

In this particular situation, the borrower had not listed their current home for sale, but wanted to take advantage of an excellent deal they found on a new home. Because of carrying both mortgages, their ratios were too high on a fixed rate product to allow them to qualify. Since their intent is to sell the other home, the 7 year ARM (fixed for the first 7 years of the loan) gave them a lower payment on the purchase and got their ratios in line. Once their other home is sold, they will more than qualify for a either a fixed 30 year loan, or the 15 year that they prefer.

During the 7 year period before the loan adjusts, they are saving approximately $32,000 over what another bank had offered them on a fixed rate. That savings will allow them to refinance to a 15 year loan with an even lower monthly payment, because of increased equity they have built up in the property.

In the past, many lenders have used ARM’s to allow borrowers on fixed incomes to buy too much house. The adjustment periods were for one to three year periods that really did not allow the borrower to build equity in their home. In many of those instances, the borrower may not have even understood the terms and conditions under which the loan would adjust. With the right borrower, and their understanding of the product, ARM’s still have a purpose and can help you build equity in your property.


© 2011 Richard Swan
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.