Modern pop culture can create myths out of thin air like no one else can. Only some of the more common include “we use only 10% of the brain” or “don’t swim for 30 minutes after eating.” However, these are just myths and are actually false.
After the housing crisis of 2006, adjustable rate mortgages (ARM) gained in infamy. Before the crisis, the issue was with borrowers being qualified for a home loan, even though they could not afford it with interest-only, No Ratio ARM, or No Income Verification mortgages. Thus, many homeowners lost their property to foreclosure or simply had to walk away from their homes when mortgage payments increased, and homes lost value.
However, a decade later the adjustable rate mortgage is making a comeback to prove it is not as bad as people believe. It is now time to begin debunking myths that surround ARMs.
Myth #1: ARMs are a poor choice because Feds raise the rates
This myth comes from the 2008 recession and is as true as saying dial-up is the quickest way to surf the web. It’s extremely outdated. These days, ARMs have a built-in protection with both annual and lifetime caps. Therefore, if you are worried about stability, look into ARMs that provide a longer adjustment period. For example, Navy Federal Credit Union 5/5 ARM adjusts only once in 10 years.
The interest rates increase and decrease in cycles, meaning if rates are currently increasing, they might go down again when your adjustment period arrives. Many ARMs clients do not refinance for a fixed rate due to the interest flux occurring between adjustment periods. Refinancing remains an option for all ARMs holders. Just be sure to calculate closing costs, so that the situation turns out in your favor. To save money in the long run, go for a combination of research and guidance from your trusted lender.
Myth #2: ARMs are only fit for short-term
Again, this is simply not the case anymore. ARMs offer fixed intro periods, ranging from one to 15 years. And if you plan short-term, you may encounter larger interest rates. So what sense would it make to give away more money for the added security of a fixed rate?
Katie Miller, Navy Federal vice president of Mortgage Lending, stated that “ARM has the potential to save holders from $10,000 to $20,000, when comparing to a 30-year fixed rate jumbo mortgage. That is enough to help with child’s college tuition or a down payment for a car.”
Myth #3: if you have ARM, rates will rise
Misconceptions associated with ARMs are due to the term “adjustable,” which makes it seem unstable. However, they are quite similar to fixed rate mortgages as they both have a 30-year term, early payoff options, and no prepayment penalties.
ARMs are unique because of the intro rate period (with usually lower rates) and potential rate changes (they can go up or down). You are protected by the knowledge of your annual and lifetime caps, even if rates seem to be unstable. When you are an ARM holder, knowledge is power. It allows you to make the necessary calculations needed for figuring out your breakeven point if the rate increases while the intro rates start getting lower. Another option is to play with ARM vs Fixed Rate mortgage calculator to see how they would compare.
Just like with any myth, research is an important part of determining it as true or false. If you calculate the initial savings of ARM plus the refinance cost, it could be quite an advantageous offer.