ARMs may not be for everyone, but they do have their benefits!

Adjustable Rate Mortgages (ARMs) have long been maligned by the Media and misunderstood by both mortgage originators and the general public. Introduced in the early 1980s as an alternative to the double digit interest rates of fixed rate mortgages of that time, they have evolved into much more consumer friendly products than the original ARMs. Their benefits, however, remain unheralded. To the contrary, the Media and Congress have painted ARMs as one of the contributing factors of the “Mortgage Meltdown” adding to the consumer’s mistrust of them.

The vast majority of people tend to look at only two aspects of an ARM: the introductory rate and the fact that the rate can go up. The second aspect is the one that is most often employed to frighten prospective homebuyers. While it is true that the payment rate on an ARM can increase, that is a hobgoblin that has rarely appeared during the nearly 30 years ARMs have been in existence. The benefits too often overlooked are the savings over the initial fixed rate period of a hybrid ARM versus a 30 year fixed rate mortgage, the additional principal reduction and the automatic rate and payment reductions that have occurred.

While it is common knowledge that the introductory rate on a hybrid ARM, one where the initial rate is fixed for specified period of time before it converts to an ARM, is generally well below the rate of a 30 year FRM people rarely examine the impact of that. On a $400,000 loan the difference in monthly payment can be on the order of $440 per month in favor of a 5/1 ARM over a 30 year FRM. Over 60 months that adds up to over $26,400. In addition, the lower interest rate of the 5/1 ARM results in an additional principal reduction of approximately $184 per month or over $10,500 for the initial 60 months. Combined with the $26,400 out of pocket savings of the lower monthly payment the homeowner realizes a net gain of more than $37,000 in the initial 60 month period of that loan.

The above savings were based on obtaining a new loan today. Homeowners who have had such ARMs have not only realized those benefits but others as well. In a real estate market where home prices have declined from their peak many homeowners have found themselves unable to refinance into the current lower interest rates because their loan amounts are higher than the appraised value of their home. Others have found themselves unable to qualify due to reduced incomes and still others due to impaired credit. Those with existing hybrid ARMs have none of these issues. Their mortgage rate and attendant payment dropped automatically on the adjustment date of their mortgage – without so much as a credit report. No appraisal, no qualifying and no costs associated with a refinance. Do you know anyone who would not be pleased to wake up one morning to find that their mortgage rate had automatically dropped by as much as 2 per cent? An additional “hidden” benefit is that the term of their loan did not change while their neighbor, who refinanced into a new 30 FRM, extended the length of time they owe on their mortgage.

Granted, while ARMs may not be for everyone, they deserve to have their benefits known.