I ran across an article at the Consumerist that offers another viewpoint in favor of the ARM – by allowing people to pay less per month (vs. a fixed mortgage), you’re allowing them more flexibility with their budgets. Its the same idea as getting a five year loan for a car, but planning to pay it off in 3. If one month is a little tougher than the others, you only HAVE to pay the minimum for the 5 year loan.
Two professors have released a paper branding adjustable rate mortgages, which are responsible for the subprime meltdown, as the optimal mortgage type for rational borrowers. As we know all too well, few borrowers are antiseptically rational. According to Columbia professor Tomasz Piskorski and NYU professor Alexei Tchistyi, ARMs hold several unrivaled advantages:
•The option to pay less than the minimum monthly interest owed on the loan is valuable for people with good self-control whose income fluctuates a lot. They can pay just a little in lean months and catch up in fat months. It’s good for lenders, too, because they don’t have to foreclose on people who fall behind, which is an expensive process. People with steady incomes don’t need this feature, but having it doesn’t hurt them.