An adjustable rate mortgage (ARM) is one of the riskiest and most complicated home loan product ever created. Adjustable rate mortgages enabled cash-strapped homeowners to refinance their mortgages at bargain rates and cut their payments in half. Adjustable rate mortgages allowed new buyers to afford to buy a home in a super-hot market. Some new home owners didn’t even need to produce documentation or a down payment. Buyers who bought property via adjustable rate mortgages will soon have mortgage payments that triple in value.
Adjustable rate mortgages allowed almost anyone to be able to afford to purchase a home. It offered low minimum payments. ARMS extended the housing boom longer than it could have otherwise lasted, especially in the hottest markets.
Adjustable rate mortgages: The Unexpected Trap
Many of the option adjustable rate mortgages taken out in 2004 and 2005 are currently resetting at much higher payment schedules. Since home prices are not increasing as fast as they have in previous years, and in some cases decreasing, borrowers can't count on using equity to help them pay their mortgage payments. Many buyers don’t realize that steep penalties prevent them from refinancing.