are ARMs bad?

[LivingAlmostLarge]

Do you think that only traditional 15 or 30 year mortgages are good? Do you think ARMs are bad? Or interest only mortgages? Does it depend on what it's being used for? What is your perception and thoughts on the different types of mortgages.

[zetta]

Interesting question. When the interest rates dropped so quickly in 2002/2003 we refinanced twice in one year. The second time, we decided to take an ARM that is fixed at 5.125% for 10 years, then can adjust by 1% each year thereafter. The 30 year fixed was quite a bit higher -- maybe 6%. Our reasoning was that we were likely to have children and move to a better school district before 10 years was up, and the difference in monthly payment would allow me to stay home for the preschool years. (Some would say we should've bought in the best school district in the first place, but we weren't able to find a house we liked in that district, and housing was in a major seller's market going up up up.) If we're still in this house at year 8 or 9, we will watch the interest rates closely and decide whether to refinance at that time.

Personally I find the ARMs that can change once a year a little too risky for my taste. I prefer a loan that is fixed for at least the first 7 years -- even 5 years seems too short to ride out bad conditions in the real estate and loan markets.

[jIM_Ohio]

If you have a rental, interest only might be smart way to go.

ARM's are good if you plan to move/ refinance within a given window.

If it's a house you plan to be in for a long time, fixed rate reduces your risk.

[bjl584]

Any loan, fixed or otherwise can be bad if you can't afford what you bought. I guess that it depends on your personal financial situation. I know people that couldn't get a loan for a lawn mower. I know other people that could buy a house for cash. But, I think that a fixed loan on something like a house is the way to go, especially if you plan to stay put for a while.

[bigsaver]

I think a fixed loan on a house is the way to go. You know what you will be paying. Also, circumstances change, so if you thought you would only live in a place for 5 years and find out you'll be living their longer, you'll be stuck with the ARM if the interest rate were to go up which it is doing now.

[Scanner]

I tend to look at it in terms of a business.

You can have fixed expenses and variable expenses. A fixed expense is something like rent. A variable expense may be something labor hours per month.

Usually in business, the goal is to have as many fixed expenses as you can. Therefore, I gravitate towards the fixed loan, even if it is a bit higher. But yes, if you are flipping or moving frequently, an ARM may make more sense.

That being said, my line of credit for my business operates on a variable rate. For some reason, last year, Bank of America really hiked it up (about 10%)- I paid down approximately $29,000 in debt to about $8900.

I guess I kinda panicked thinking it could even climb higher.

It depends on how on top you are of your finances and how fluid you are with management.

[newlyfrugal]

We had an ARM and got burned. We distinctly remember having things explained one way and then found out the reality was different. We were told it was a 3 year ARM and that the rate could only go up 1% per year to a maximum rate. WRONG! We got a letter they day our loan turned 2 telling us that our rate at jumped from 5.5% to 9%. YIKES! We couldn't refi fast enough! We ended up with a 30 year fixed at 5.625% that we are planning on paying off in 15. Needless to say we are a little gun shy with anything resembling an ARM.

I don't know anything about interest only, but I don't know how it could be good unless you are planning on moving in a very short time or planning on your house gaining equity super fast. Even then they seem riskier than I would want for the roof over my head.

Sara

[JBinKC]

ARMs are risky but not necessarily bad. ARMs are great way to get in a bigger house when the yield curve is normal. That is the major reason why we had a housing boom short term rates stayed so low for a very long time and the yield curve remained normal. Unfortunately, that is not the case at the moment hence the current housing bust.

As long as you can forsee a short term permanent income rise within 6 months with intentions of reducing your risk by refinancing with a longer term mortgage they are OK to use but that would be the only instance I would consider them.

[PauletteGoddard]

Do you think that only traditional 15 or 30 year mortgages are good? Do you think ARMs are bad? Or interest only mortgages? Does it depend on what it's being used for? What is your perception and thoughts on the different types of mortgages.

The variety of mortgage does depend on what it's being used for.
I believe everyone should stick to investing or putting money in things they understand. If your understanding of ARMs, neg amortization, interest only loans exclusively comes from what the seller of those mortgages tells you, they might not be best. If you're a sophisticated real estate investor, you already know what's best for you.

I have a 20 year mortgage, fixed rate, and I like it loads. The real estate market could drop 30% and I'd still have positive equity. The rate will stay fixed until I refinance or, preferably, pay off the mortgage, when the rate will change to a fixed rate of 0%.

[Daylily]

Are you doing research? Based on your blog, you have an ARM and it sounds as though you are pleased with that decision.

[LivingAlmostLarge]

Yep, nope I'm just wondering what people have and why they got it. I am happy with my ARM, I've got another 5 years and no way am I living where I'm living in 5 years. If I am seriously kill me. I will hate myself by then. I figure 3 more years to go.

[Daylily]

15-year fixed. I'm set to pay it off in 9 years, 3 months. However, if I get more agressive I may try to pay it off in 7 years.
Personally, I'd never do an ARM.

[LivingAlmostLarge]

I've even had a Heloc in the first mortgage position on our last condo. The rate was a ridiculous 2% and we could pay it off faster. It turned in our favor, then as rates rose we refinanced into a fixed 30 year fixed. Which was okay, but we thought then we would keep our place forever. Turns out we didn't.

Thus I've learned that never make plans for forever, it doesn't work. Just do the best you can as you know it.

I am however pretty sure I'll never do a 15 year fixed, mainly becuase you can do a 30 and pay it in 15, but you can never go from a 15 year to 30 year payment if you need to.

I still think that most people should understand all mortgages, especially the one they pick. No mortgage is inherently bad, I just think people abuse them like CC. And are quick to blame the lender, when they should have been more educated. Exactly like CC.

[th_tan]

Personally, I think going with a 30 year mortgage is best unless you know your moving within a certain period of time, of course you can refinance later if its going to benefit you.

[PetMom]

These are well liked when the rates are good.

I just do not trust those things unless you can really stay
on top of it and know what you are doing, and as posted
can refinance in a hurry.

I thought there was a slew of these in recent years to
get people into houses they really could not afford with
'teaser' rates that could go up in a moment's notice or
so it seemed to the people paying the mortgage.

I too prefer the 30 year with the no prepayment
penalty clause in it. A person can custom tailor the
payoff plan to their tastes and situation.

[Ima saver]

Well, I have never had an ARM. When I bought my first house, they always financed for 20 years.
I have had a few land mortgages, but I always went with a fixed rate mortgage.
I am mortgage free, glad to say!

[myself]

Originally Posted by LivingAlmostLarge

I've even had a Heloc in the first mortgage position on our last condo. The rate was a ridiculous 2% and we could pay it off faster. It turned in our favor, then as rates rose we refinanced into a fixed 30 year fixed. Which was okay, but we thought then we would keep our place forever. Turns out we didn't.

Thus I've learned that never make plans for forever, it doesn't work. Just do the best you can as you know it.

I am however pretty sure I'll never do a 15 year fixed, mainly becuase you can do a 30 and pay it in 15, but you can never go from a 15 year to 30 year payment if you need to.

I still think that most people should understand all mortgages, especially the one they pick. No mortgage is inherently bad, I just think people abuse them like CC. And are quick to blame the lender, when they should have been more educated. Exactly like CC.

What you say is true. However, I consider it a sign of self-imposed early mortgage payment. Instead of saying, yes dear we can get another <widget> even though it's just a little different than the one we have already.
FWIW, we have 13 years left on a 15 year fixed mortgage @ 5.25%. As a matter of fact, this coming November is the halfway point (my phrase for "the point where more of the monthly payment goes towards the principle").

Now, since the mortgage is fixed for that term, we can focus on generating money with what is leftover, and figure the mortgage will be paid off by the time I'm 56 (and the Mrs. is 49).

And the first mortgage on the same house (in 2000) was a fixed 30 year @ 8% (due to our higher debt to income ratio and credit ratings at the time).

[LivingAlmostLarge]

People who are disciplined enough to understand ARMs, CC, and other loans responsibly are typically able to use a 30 year fixed to their advantaged. Say you want to max out your 401k/IRAs, but with a 15 year fixed you can't. But if you get a 30 year you can.

So you do it. Then as your income rises, you are suddenly able to pay more to the mortgage. Chances are you will, why? Because if you were disciplined enough to think about maxing out all retirement contributions and saving opportunities, then you probably are not fiscally irresponsible.

But that's just it, I think. Fiscally responsibility still falls to the person.

[Ima saver]

If I had to get a mortgage today, I would go with a 15 year fixed rate mortgage.

[msnln]

I have never had ARM mortgage but if I were to get a mortgage now, I would probably go with an ARM instead of fixed 15 or 30 years.
ARMS are getting a lot of trashing these days because up until couple of years ago, short term interest rates were very cheap. As such, banks used ARMS like teaser rates to induce people to buy more house than they would have been able to afford. Then, the Fed started raising rates and Fed Funds rate went from being 1% in 2003 to 5.25% today.

At current rates, Fed Funds are stable and chances are Fed will have to start cutting the rates, especially if housing bust causes recessionary pressure. That means ARMS rates will start going down, more so than fixed rate mortgages. These cycles take few years so you can get better rates until Fed Funds rate go down to about 3.25 - 3.5% and then you can refinance to fixed rate.

To me, interest only loan = rent. IF you are going with IO loan, then don't buy a house, just rent until you can afford mortgage payment.