« A job market on the edges | Main | Economic terms »

November 21, 2007

Who should use ARMs?

The interest rate a homeowner pays on an Adjustable Rate Mortgage can be adjusted, or changed, and recently rates have been adjusting higher, which means many households with ARMs have seen there mortgage payments rise. For some homeowners, this has led to bankruptcy. N.C. State University economist Dr. Mike Walden discusses ARMs and whether homeowners should avoid them. Listen

"ARMs really have gotten a bad reputation right now because many folks who took out ARMs several years ago have had those rates adjust and were surprised," says Walden, a professor of agricultural and resource economics. "They can't make the higher payments and that's led to foreclosures on their homes, and that has led to the housing crunch and housing crisis right now."

However, Walden adds, "ARMs are actually good in some situations. Clearly if you knew or had good advice suggesting that interest rates were going to fall in the future, what you would want to do if you were going to buy a home is take out an ARM, ride that rate down, and when it got to the bottom, jump off the adjustable rate onto a fixed rate. That would be a very smart strategy. Of course, that would mean knowing where interest rates are going.

"The other situation in which ARMs are good is if you are only staying in the home for a very short period of time, maybe only two or three years. Maybe you want to own a home and know you are going to be transferred or move to anther town in a couple of years. You could take out an ARM, your payments will likely be much lower than with a Fixed Rate Mortgage and you really don't care too much about the adjustment because you are going to be gone in a few years. We shouldn't really throw out ARMs. They are certainly good in certain situations."

Posted by Dave at November 21, 2007 08:00 AM