The adjustable rate mortgage was blamed in part for the recession, but it is starting to make a comeback. Image from Wikimedia Commons.
One of the supposed causes of the real estate collapse and recession of the last few years was something called an adjustable rate mortgage. An adjustable rate mortgage, or ARM, can be misunderstood and, in fact, has a lot of benefits for some buyers. The ARM is starting to make a comeback.
Adjustable Rate Mortgages vilified
During the real estate crash and recession, one of the financial instruments that was blamed was the adjustable rate mortgage. Unscrupulous loan lenders would offer mortgages with a low introductory rate. The interest rate would be drastically raised, pulling the rug from under the homeowner. However, when handled by the right bank and in the right situation, the adjustable rate mortgage, or ARM, is not inherently evil. For some people, it is the perfect loan, according to CNN. That is largely why sales of ARMs have risen to 5 percent of all mortgages in 2010, up from 3 percent in 2009. It is predicted that 10 percent of all mortgages lent during 2011 will be ARM loans.
Perfect for some homeowners
The flagship of all mortgages is the 30-year fixed rate mortgage, in which the rate never changes. An ARM has a lower introductory, averaging currently about 3.5 percent. The increments at which an ARM can be raised are limited by law, and so is the final interest rate. If a person plans to live in the home for five years or fewer, it makes more sense to get an ARM, as payments will be less and payments over the minimum can net greater equity. So if a person is planning to transfer from Jackson, Mississippi, to Birmingham, Alabama only a few years from when they purchase the home, it may be better to go with an ARM.
Flipping houses
The ARM is also great for homeowners attempting to flip homes and sell them for profit. By selecting an ARM, the homeowner has more instant cash that can be put into the remodeling budget. The trade of flipping houses could also make a comeback, according to Reuters, as the Federal Housing Association is extending a program providing government backed mortgage insurance on homes that are resold within 90 days of a previous sale.
