The post-recession rise of ARMs

Despite the low rates being offered on fixed rate mortgages (FRMs), some homebuyers are still opting for a risky adjustable rate mortgage (ARM) with its temporarily lower interest rate. In the first quarter of 2011, ARMs comprised 7.8% of the California mortgage market, marking the highest market share of dicey ARMs since the housing market crash in 2008.

For those who plan to pay off their mortgage or move three to five years after they buy their house, an ARM can be an appealing money saver. For everyone else, however, the fixed-rate mortgage (FRM) remains the safest bet.

Financial advisors warn against an ARM for anyone who plans to stay in their home longer than five years, which includes nearly every new homeowner in the wake of the Great Recession.

first tuesday take: As a matter of policy, first tuesday opposes the use of ARMs to finance a homebuyer’s purchase, especially when 30-year FRM interest rates, both nominal and real,  remain at historical lows.  The risk of loss imposed on a borrower by an ARM loan is unacceptable for all but some of the very wealthiest homebuyers.

The instant gratification funded by an ARM is not worth the gamble and agents need to caution their homebuyers to avoid the lure. Most homeowners who finance their home purchase with an ARM do not anticipate or understand the financial effects of such a loan when they reset or the resulting shift in the home’s hedge against future inflation to the ARM lender. Our educational systems do not teach students about the economics of fulfilling the American Dream. [For more information regarding ARMs, see the May 2011 first tuesday Market Chart, The iron grip of ARMs on California real estate and the March 2011 first tuesday article, The ARMs threat: monitoring a sustainable recovery.]

Word to the wise: buy no greater home than what you can at a fixed rate.

Re: “The appeal of adjustable rates” from the NY Times