what's all the talk with the risk of arm mortgages?

I am reading a lot of articles about the risk homeowners took by getting the arm mortgage in last couple years. Articles say that rates will readjust to a much higher rate once the initial period is over. However, they can easily move their mortgage to a fixed rate one easily, right? Since fixed rate mortgage rates are close to their lowest point in history, homeowners will not get in trouble financially. However, there are huge risks for getting these arm mortgages right now since the future of fixed mortgage rates is unknown. Also, people who bought the option mortgage where homeowners pay super low introductory rate are also at risk. However, I do not see any risk for people who already have arm mortgages since they can easily move into a fixed one. Am I missing somthing?

7 Answers

  • 1 decade ago
    Favorite Answer

    Those already in an ARM would be only subject to risk upon expiration of the fixed period. Timing that can be tricky and if rates are not in an advantageous position at that time you can end up with a higher rate / payment.

    Prepayment penalties are also a factor. Moving at ANY TIME is not possible on many ARMS. It would depend on the prepayment penalty period, if one exists with the loan. Some states forbid prepayment penalties.

    The last remaining risk is associated with potential pullback in values and the shortfall it could cause in loan - value ratios. Again, this is a tricky timing issue and in cases where the home was 100% financed 2 years ago with a 2 year fixed rate ARM...there is problems getting them out of that loan until values come back up. This is the main risk associated with ARMS....high loan to value mortgages.

    Here is some additional info. Hope this helps.

  • Anonymous
    1 decade ago

    arm's sometimes have a fixed rate and then you hit the adjustment. Straight arm's (no fixed period) are a bad way to go. The interest rates have gone up from the historic low rates we just had. Some arm's readjust more than once a year which will raise your payments alot more.

    Always get a fixed rate loan, the rates are the lowest over the course of a loan. If you use an arm, get only those that have a fixed period (generally 5 years) before the adjustment.

  • 1 decade ago

    The risk is not in the loan, but the loan officer. During the mortgage boom that you're hearing horror stories of, loan officers did a poor job of explaining to their customers what ARMs and option ARMs are and what they do. Since then, we have a pamphlet we have to give people every time the possibility of an ARM occurs. ARMs, when you know what you're getting into, are actually quite useful. They carry a rate advantage over fixed rate loans, and with the frequency at which people refinance lately (every 5 years), giving someone a 5 year fixed ARM makes sense. With option ARMs, it's a matter of educating your customer to know that if you pay that minimum payment, the difference between the minimum and the fully indexed payment goes on the balance of your mortgage, so you'll have to pay extra later to get back on track. The other thing is the customer themself. People who are buying investment properties for rehab tend to like short-term fixed ARMs and option ARMs because it helps with their cash flow. So, really, the product itself isn't bad, just the loan officer that sold it to you without educating you first, and these are the guys that give guys like me a bad name.

  • Anonymous
    1 decade ago

    Yes, The ARMs were taken by people who could not afford high payments and now that their payments are going up they have a prioblem. Secondly, a lot of these people had poor credit and still can't get a fixed rate note. Third, some of this is scare literature like the Real Estate market is tanking.

    I'm seeing a lot of activity in the multi-family market because the rates are low. Savvy homebuyers are looking for single family homes right now as well. I guess some of us have been so busy we haven't had time to read the news.

    Source(s): An Agent
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  • 1 decade ago

    Yes, you are missing something. While its possible today to move into a low rate fixed mortgage, if interest rates go up in the future then the rates for fixed-rate mortgages will go up too and you will no longer be able to escape the ARM rates by moving into a fixed rate.

    That being said, there is nothing to indicate mortgage rates are going to go up anytime in the next few months, but who knows what the future holds.

  • 1 decade ago

    ARMs can be good for investors who want to flip there properties

    However, When you have an ARM you run the risk of getting wacked with higher rates. So the gamble begins.

    Lock in and know what you will need to pay.

    Or Gamble on the Fed and the economy.

    Whats really scarey is a 30 year fixed with a Jr mort 10 year arm

    and people using all the equity in there home. not to mention credit card debt. If housing prices drop alot the forclosures will be at record levels.

    Source(s): agent in Chicago
  • 1 decade ago

    I don't know about arm mortgages, but these pains in my leg mortgages are killing me! HA HA HA

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