Before discussing whether or not the adjustable rate mortgage (ARM) is dead, let's first check out what ARM is all about. We can define an adjustable rate mortgage as a home loan wherein the interest rate on the mortgage note adjusts periodically. These adjustments depend upon factors like 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). As per the report of the Mortgage Bankers Association, presently ARMs account for just 5.5% of mortgage applications.
Are there any benefits of ARMs?
There are two major benefits of adjustable rate mortgages. Let's check out what they are and if people can take advantage of those benefits these days:
- Low initial rate: ARMs initially have a low rate. This means the borrower will have to pay a smaller monthly payment than a FRM of the same size. Thus, it becomes easier for a borrower to qualify for a loan as well as afford the loan.
- Low interest rate: ARM is attractive to borrowers if one believes that the interest rates will remain low over the years to come or will fall lower.
However, though ARMs have their own benefits, they have become unappealing to people these days. This is because the rates are already going low and it's expected that over the years they would rise. Thus, the application for ARMs has fallen drastically and it's been said that the adjustable rate mortgages are dead.
Having said that, there is still another feature of ARM wherein borrowers can find some benefit. With every ARM adjustment, the new payment is figured by using the new interest rate to the outstanding debt. Thus, if the borrower wants, he/she can reduce the payment by making extra payments towards the principal.
If you pay a lump sum amount towards your mortgage balance both in case of a fixed rate mortgage (FRM) and an ARM, you'll find that in both the cases, you'd be able to save a lot on your interest costs. But the difference lies elsewhere. In case of FRM, your monthly payment would remain same but you would be able to pay off the loan early. But, in case of an ARM, you'll have the option of making smaller payments whenever you want.
So, in my opinion, it won't be a good idea to declare that adjustable rate mortgage is dead. I feel that it has it's own benefits and is here to stay.