Adjustable Mortgages
A sensible option, or the long ARM of doom?
By Tim McNellie
With all the
turmoil
they’ve
brought to
the
financial
markets lately, adjustable rate
mortgages have become a fourletter
word in the minds of
many homebuyers. That’s a
radical change from just a few
years ago, when, during the
halcyon days of ultra-low
interest rates, an ARM was
considered a reasonable option
for just about any homebuyer.
Today, they’re widely viewed as
reckless, and harbingers of
foreclosure and personal
financial doom.
“As recently as a year ago,
everybody was completely at
ease with ARMs. They were not
a huge concern” says Sonny
Bringol, president of Victorian
Finance in Bethel Park. “With the mortgage crisis coming into
play, nine out of 10 homebuyers
won’t even consider an ARM
these days.”
The trepidation is
understandable. In recent months,
huge numbers of homebuyers
with less-than-perfect credit have
reached the end of their
introductory rate periods – the
time frame in which their
mortgage payment was based on
the interest rate of the day they
got their mortgages. When the
introductory “teaser” period ends,
the rates “reset,” meaning they
change to reflect current interest
rates. For many, that made their
monthly mortgage payment
skyrocket, often beyond their
ability to pay.
"The real estate
market in the
South Hills is
very stable. In
fact, home
prices are even
edging up.
We never
experienced the
bubble that
affected home
purchases
across the
country. There
was no
over-production
here. Realtors
in Pittsburgh
are very professional.
We give
buyers and
sellers a sense
of confidence
in the process."
- Connie Hickey, Howard Hanna
But homebuyers shouldn’t
automatically object to ARMs,
mortgage experts say. Certain
people could save money by
taking out an adjustable
mortgage. This is especially true
if someone is only going to be in
a house for just a few years.
Taking advantage of those low
introductory rates before moving
on to a new residence (or
refinancing the ARM at a
favorable rate) could mean big
savings.
There is a serious risk
involved, though. What if, for
whatever reason, you end up
staying in the house longer than
planned? Without paying close
attention to market conditions
and interest rate movements, you
could find yourself facing gigantic
mortgage payments. “The
question I pose to people is: In
five years do you know whether
you’ll be in that house or not?”
Bringol says. “If you will be, don’t
expose yourself to the risk [of an
ARM]. It’s hard to predict where
interest rates will be.”
For those already in ARMs
and looking to get out, finding
the right moment is a matter of
timing. Consider a homeowner
who has an ARM at a 4.5 percent
rate that is set to re-adjust in two
years. If he were to re-finance
tomorrow to a 30-year fixed-rate
mortgage, his new rate would be
about 6 percent, which would
immediately raise his monthly
payment. The question he must
ask is: Between now and two
years from now, will interest rates
go up or down? If they go down,
he can re-finance at a later date.
But if rates go up, and he doesn’t
re-finance now, he’s going to be
stuck paying at an even higher
rate than 6 percent.
For the financially savvy, an
ARM can pay off big time. For
those who want to avoid fretting
over their mortgage payments
more than they already do, a
fixed-rate-mortgage might be the
more sensible way to go.
"The Pittsburgh market is unique and a
very good place to buy a home. Right
now, the factors – low interest rates,
stable pricing – are positive. We don’t
have wild swings here. Pittsburgh is like
a locomotive that keeps chugging along.
What we do have is the expertise to
know how to personalize a property so
that it suits the needs or lifestyle
of the buyer. Everything from room
enhancements to color coordination to
customizing each fixture."
- Grady Gaspar, Regional Marketing Manager, Ryan Homes
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