The adjustable rate mortgage or ARM loan was super popular during the real estate boom, and then it caused serious problems as people who took out low interest rate ARM mortgages got bushwhacked by adjusted rates that skyrocketed their monthly payments. Everyone shifted as fast as they could into more reliable and safe fixed-rate loans, because those carry interest rates that never change – even if prevailing rates go through the roof. Those who didn’t get to move into fixed rates loans added to the historically high numbers of defaulting homeowners and millions of ARM loan borrowers lost their houses to foreclosure.
But rates have been relatively low and steady for the past couple of years, and in the wake of the credit crunch the Treasury and Federal Reserve acted in ways that dropped interest rates very low. Those who had ARM loans during that period of time probably fared quite well, because if they took out those ARM loans when rates were high they enjoyed watched their mortgage rates and monthly payments drop as the Fed slashed rates down to the bone. Suddenly ARM loans did not look so scary any more, and according to recent mortgage industry statistics the popularity of adjustable rate mortgages is coming back.
But smart borrowers should still beware the ARM mortgage. With mounting national debt the Fed is under pressure to start ratcheting rates back up again, and even if they keep rates where they are for 2010 we will likely see rates start to climb as soon as the economy begins to recover. Once they start going up they will probably have to keep rising in order to keep the economy under control, and that will make any ARM loans that are originated now get increasingly expensive over the next several years. Those who stick to fixed-rate loans, on the other hand, will have nothing to worry about because their loans are not going to be volatile but will stay the same year in and year out until they are paid off in full.
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