Uh oh...

[james.hendrickson]

Danger Will Robinson!! Danger!!!

Source: CNBC.

[kork13]

Honestly, in this environment, an ARM that adjusts 5 years from now could be pretty reasonable, if it means a lower rate in the interim. It's not an unreasonable possibility that mortgage rates will slowly drift down in a few years if inflation cools down & growth remains healthy. So an ARM could serve as 'patience' while rates (hopefully) settle.

An ARM (in and of itself) aren't bad products. They can become problematic when they're structured as interest-only with a balloon payment, or they don't have limits on how much the mortgage rate can go up, .... or if the owner doesn't pay attention & refi ahead of a disadvantageous adjustment.

[james.hendrickson]

Kork,

Well, you're far more optimistic than me. I'm thinking the FED might have to raise interest rates to combat inflation, which means that adjustable rate notes are all going to reset upwards. Which could exacerbate default rates.

[corn18]

The big uh oh is that people that were like me cannot afford the house they are buying so they get an interest only, 0% down, 5/1 ARM. I did that. Ended up with 48% debt to income but the broker found a way to get me the loan.

[james.hendrickson]

The big uh oh is that people that were like me cannot afford the house they are buying so they get an interest only, 0% down, 5/1 ARM. I did that. Ended up with 48% debt to income but the broker found a way to get me the loan.

Umm hum. The ARMs are a red flag, for sure.

[ua_guy]

5.20% to 5.37% increase doesn't really worry me. The headline's font size is bigger than my concern at this time...lol

Borrowing qualifications are still very different than what led to the previous housing collapse, and the sinister shuffling of bad debt between lenders and insurers isn't happening like it used to. At least not yet.

[bjl584]

I'd like to see the details on exactly who is applying for ARMS.
The majority could be real estate investors.

[LivingAlmostLarge]

Again I have and have had a LOT of arms. So many arms i haven't had a fixed rate since 2002 through 3 houses. I bought 2 hosues with arms in 2005 and 2017. Again arms are not the problem. Many reasons to get one. I have 2% 7/1 arm adjusting in 6/2028 with 2% annual cap and 6% lifetime so the most i can pay is 8%. 8% after 10 years that is because with the 2% annual cap i won't hit it for 3 more years after 7 so total 10 years. After 10 years I will have paid down so much that 8% on the principal I will still come out ahead but chances are I will have moved or I will be able to refinance and it will still cost me less than a 30 year fixed would have cost me.

Like I said people need to reason it for themselves. Run the numbers in black and white.

[bjl584]

Again I have and have had a LOT of arms. So many arms i haven't had a fixed rate since 2002 through 3 houses. I bought 2 hosues with arms in 2005 and 2017. Again arms are not the problem. Many reasons to get one. I have 2% 7/1 arm adjusting in 6/2028 with 2% annual cap and 6% lifetime so the most i can pay is 8%. 8% after 10 years that is because with the 2% annual cap i won't hit it for 3 more years after 7 so total 10 years. After 10 years I will have paid down so much that 8% on the principal I will still come out ahead but chances are I will have moved or I will be able to refinance and it will still cost me less than a 30 year fixed would have cost me.

Like I said people need to reason it for themselves. Run the numbers in black and white.

Assuming people are going to be as diligent as you are of course.
The problem, as has already been stated, is that the average person who isn't as savvy will be lured in by the apparent low rate/payment, only to be hit with a huge increase in their payment at some point down the road.

[james.hendrickson]

Assuming people are going to be as diligent as you are of course.
The problem, as has already been stated, is that the average person who isn't as savvy will be lured in by the apparent low rate/payment, only to be hit with a huge increase in their payment at some point down the road.

BJ, I'm with you on this one.

LivingAlmostLarge I'm with BJ on this, I think a lot of people have issues reading an amortization table, or all they focus on is the initial payment. Personally, I've gotten into trouble with ARMs in the past by doing precisely what BJ mentioned - not thinking through what might happen if the interest rate increased.

[LivingAlmostLarge]

BJ, I'm with you on this one.

LivingAlmostLarge I'm with BJ on this, I think a lot of people have issues reading an amortization table, or all they focus on is the initial payment. Personally, I've gotten into trouble with ARMs in the past by doing precisely what BJ mentioned - not thinking through what might happen if the interest rate increased.

When the rates increases in 7 years then you have an amortization table that tells you the amount paid down in 7 years. Then you look at that number and see what it will be and assume a Initial+2% rate and run an excel spreadsheet. That's what I did and then after 10 years assuming it caps out at 5% max so the maximum is 7% on the smaller number...

But you are probably right that people don't consider rate changes

[GoodLiving]

My first house purchase was an ARM, we were very young and on one income. We ended up refinancing for a fixed and then the interest rates kept dropping so every few years I would refinance for a lower interest rate/payment. Fast foward to no mortgage. Life goes fast!