ARMS – better than a fixed rate mortgage?

Not that long ago, when mortgage rates were commonly 10% or higher, ARMs were looked upon as a more favorable type of mortgage. (At that point, if the ARM was going to adjust, it was going to go lower, not higher, so adjusting was a good thing.) Historically, unless you were locking in during a time of extremely low interest rates (like now), an ARM would be your best bet over time. Sounds crazy now, what with all of the subprime mortgage fallout, but its true.

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.

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4 thoughts on “ARMS – better than a fixed rate mortgage?

  1. Just thinking about ARM’s today and wondering if this would be a good idea for our next house… do you know if its true that if you prepay an ARM (and rates don’t rise), then payments will drop as the mortgage readjusts for a 30 year payoff?

  2. “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.”

    A far better idea is to use a Home Equity Line of Credit (HELOC) as an “interest cancellation” account to accelerate home equity and payoff the home years sooner than per the amortization schedule.

    Today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.

    And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.

    A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)

    And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.

    It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.

    I’d be happy to provide further details…

  3. I have a fixed rate mortgage with Wells Fargo. I am in a little bit of financial problem because of my daughter’s financial problems. How can I pay less on my mortgage without penalty (paying for it in the end). Thanks

  4. These loans are revolving in most cases have a very lower interest rate.
    Even though you are going to have to pay a commission if you use
    one, I would strongly advise that you just get the help of an advert property broker.
    They usually do not have to wait for any committee in order to meet to discuss your loan.

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