Adjustable rate mortgages are taking all the blame for the current mortgage and foreclosure crisis. I would bet most people don’t know too much about this particular critter.
To start with a pure adjustable rate mortgage is just that. It’s rate adjusts from day one. On the other hand, there exists a subset generally called hybrid adjustable rate mortgages. These mortgages are also wear the shortened acronym ARMs.
Unlike the vanilla ARM these mortgages have fixed payments for a few years, and then turn into adjustable loans. They are named after their numbers. For example, a 2/28 or a 3/27 ARM.
The first number refers to the years the loan has a fixed rate and the second number refers to the years the loan has an adjustable rate. That is easy to understand.
Other ARMs use a different numbering system. For example the 5/1 and 3/1 hybrid. The first number refers to the years the loan has a fixed rate, and the second number refers to how often the rate changes. In a 3/1 hybrid ARM, for example, the interest rate is fixed for three years, then adjusts every year thereafter.
After reading this explanation, you can see why people were confused about what type of ARM they had as a mortgage. You can also see why rates adjusted when they did. The part you can’t see is to what Index these ARMs were tied. I’ll explain that in another post.
MHJ
Rep Points: 350
Personally, I would avoid an adjustable rate mortgage mainly because they can end up costing you far more money than what they have the potential to save. Too risky for me.
I heaar you MHJ but they have a place in your portfolio if you are an investor. I can remember using ARMs when I was buying and flipping properties. They provided the lowest payment and qualifying was extremely easy.
In today's world, I'd use them again especially if they were the 5/1 variety. I'd even use an interest only on my investment portfolio homes. Once you understand these critters you will see how they fit into your real estate plans.
Just my 2¢ but having been there and done that I think I may have just put forward 3.5¢ <lol>
