NEWS YOU CAN USE -  Increased Interest in ARMs

Compiled By:  Twomey, Latham, Shea & Kelley, LLP

People who steer away from investing in the stock market due to the risk can be found risking their borrowing power and home by refinancing or applying for an Adjustable Rate Mortgage (ARM). According to the Wall Street Journal, applications for ARMs are on the rise. Instead of locking-in a low fixed interest rate mortgage, thirty percent (30%) of borrowers are opting for an ARM. That's a seventy-six percent (76%) increase from last year.

Interest in ARMS Rise

Why are borrowers applying for these potentially risky loans? One reason is the low initial interest rate of an ARM. Some ARMs have fallen to a 5% interest rate and homeowners find that they can considerably reduce their monthly mortgage payments.

ARMs are also attractive to borrowers who relocate often and do not anticipate living in their home for more than five years. However, if you plan to stay in your home for more than five years, it makes sense to opt for a fixed-rate mortgage. A fixed-rate mortgage provides the borrower with a guarantee of a fixed monthly payment and therefore, no surprises. Borrowers with ARMs however, could see payments climb if interest rates rise.

An average monthly mortgage payment on a $200,000 ARM with a 5% rate is $1,073.64. If the rates rise to 7%, the payment would rise to $1,330.60. At 9% you would find yourself paying $1,609.25. Why take that risk when fixed-rate mortgages are currently at 6.0%, a low not seen in more than 30 years.

Be weary of hybrid interest-only mortgages even if the initial rate offered is very low. These loans allow a borrower to make monthly payments for up to fifteen years on the interest only. The potential problem is that the borrower is not paying any thing towards the principal, therefore not building any equity in the property. The danger here is that if property values fall, the borrower may be faced with owing more than the property is worth.

Also beware of mortgage company marketing efforts. Many defend their ARMs and no-interest mortgages stating that many borrowers take the money to pay down higher interest consumer debts, to invest, or pay for remodeling. But these loans are risky and you could find yourself paying higher rates in a few years, gaining no equity in your property and if the property loses value, you could still be paying higher rates in the future.