Are ARMs safe now?

I’ve always been told to be scared of ARMs because of what happened in 2008, but they’re looking good right now. Our mortgage guy says they’re pretty safe, but I’m still a bit unsure. Are ARMs safe to get these days? Our current interest rate is 7.5%, so these options seem much better.

Here’s what our refinance could look like:

  • 30-year fixed: 6.125%, $659 discount points, monthly payment = $1865 (principal & interest) + $354.43 (escrow) + $92 (PMI) = $2311.43
  • 7/1 ARM: 5.50%, no discount points, monthly payment = $1743 (principal & interest) + $354.43 (escrow) + $92 (PMI) = $2189.43

What do you all think?

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I spoke with a mortgage broker last week, and she strongly advised against getting an adjustable-rate mortgage (ARM). She shared a story from around 2008 when her sister-in-law’s mortgage payment doubled, ultimately leading to her becoming homeless because she couldn’t keep up with the payments. The broker emphasized that I should never consider an ARM.

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In 2008, many practices were common that are no longer allowed today. Before the financial crisis, negative amortization (negam) loans were offered on primary residences, which may be the situation you mentioned. Borrower qualifications were much more relaxed and unregulated. After the market crash, the industry underwent significant regulatory reform, introducing strict guidelines to assess a borrower’s ability to repay their loans.

Today, there’s no possibility that a mortgage payment would double due to obtaining an adjustable-rate mortgage (ARM) on a primary residence. Negam loans are now illegal for primary residence mortgages, as they are considered predatory. While ARM loans aren’t suitable for everyone, they are often misunderstood, and many people don’t fully grasp their true pros and cons.

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This broker is unreliable, and I wouldn’t trust them with a $100k conventional purchase. Today’s ARMs (Adjustable Rate Mortgages) typically have a capped increase of around 1% over a 6 or 12-month period, so the days of major adjustments and huge rate hikes are behind us.

That said, I wouldn’t recommend getting an ARM right now. With recent margin compression, the benefits are so minimal that the small potential adjustment isn’t worth the risk. In most cases, you’re only looking at an eighth to a quarter-point difference, so why take the chance?

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Typically, I’d agree with everything you’re saying. However, it’s interesting to note that he managed to find a lender offering a 7/1 ARM at 5.5% with no points. That’s significantly better than the rates ARMs have usually had in recent years. Honestly, I’d go for that deal right now.

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If she mentioned she’s against them because of an incident with her sister-in-law from 16 years ago, it suggests she may not be up-to-date with current industry trends. In that case, you might want to consider another advisor. The situation she described likely involved a negative amortization adjustable-rate mortgage (ARM), which could have increased the balance for a few years and had adjustable rate caps, possibly doubling the rate. However, such loans are no longer available.

Personally, I’m still cautious about ARMs unless the rate is at least 1% lower than a fixed-rate mortgage. If you plan to sell before the ARM adjusts, then it could be worth considering.

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I wasn’t actively searching for one; it came up during a conversation while I was at work. I meet a wide range of people.

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I’ve used adjustable-rate mortgages (ARMs) for years to save money, but it’s crucial to understand how they work. ARMs from before 2008 are very different from those available today. Features like negative amortization and payment-option ARMs are no longer common.

Here’s a snapshot of my last two ARM loans:

  • For a condo in the city, which was always intended to be a short-term property, I took a 5-year ARM at 3.375% when 30-year fixed rates were around 4.25%. I lived there for two years and saved a substantial amount of money.

  • My current loan is a 7-year ARM at 2.125%, with adjustments starting in May 2028. At the time, 30-year fixed rates were about 3.125%. The rate caps are 5/1/5, meaning the highest it could go is 7.125%. Before inflation spiked, I planned to pay this loan for 15 years, knowing that after 7 years, I’d be well ahead of the amortization schedule. As a result, my payments would decrease significantly once the loan starts adjusting. Now, with my savings account earning over 5%, I make minimum payments on the loan and invest the extra into savings. By March/April 2028, I plan to pay off at least 50% of the remaining balance.

ARMs can be an effective tool when used wisely. Be sure to discuss caps, adjustment schedules, and other details with your advisor to determine if an ARM fits your long-term plan for your home.

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ARMs are actually quite common globally. In the U.S., we often don’t realize how fortunate we are to have fixed-rate mortgages.

Despite their prevalence, choosing an ARM over a fixed rate can be unwise. A 30-year term is a significant commitment. The 2008 financial crisis impacted many Americans, and COVID-19 affected numerous people around the world.

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Not foolish at all; it just needs to be used in the appropriate situations.

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I can agree with that, but the right circumstances are the exception rather than the norm. If you have to ask, it’s likely not for you. So, in the OP’s case, it’s probably a bad idea.

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Understanding the complexities of lending products isn’t necessary to be a good fit for them; just make sure to ask questions. The real issue lies with those who grab the lower rate without asking questions, only to find themselves in a difficult situation later and then blame the loan officer, bank, or others.

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The listed option is a fixed rate for 7 years. It seems reasonable if we don’t plan on staying in the house for long, but it’s also somewhat unsettling.

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Interest rates are expected to drop soon, so you wouldn’t be able to benefit from the current rates. Additionally, I have little confidence in our monetary policy, so I’m uncertain where we’ll be in seven years.

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I’d review the amortization table to determine the remaining principal after the fixed rate period ends. This is the amount you’ll need to refinance later. While an ARM helps with current cash flow, you still carry the debt when refinancing.