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Adjustable Rate Mortgages

Avoid Them Like The Plague!

ARMs. You've read the headlines. Perhaps you even know someone close to you who is experiencing this hardship.

That's right homeowners all over the country are losing their homes through default and foreclosure because they could not make the higher monthly obligation when their payments jumped through the terms in their Adjustable Rate Mortgages (ARM's).

To make matters worse, until just recently, it was common practice for some prime and sub-prime lenders to allow persons on a fixed income, first-time buyers, and/or buyers with a less than stellar credit score to borrow up to 125% of their home's appraised value.

Have these lenders done these homeowners a favor? Certainly not! Nor has our nation's economy benefited from putting struggling home-buyers into a debt situation they cannot buy their way out of.

A low introductory rate ARM, which made an incredibly low house payment, enticed many people to buy homes above and beyond their means of income. Sure, the payments were affordable at first. When people want something bad enough, it's easy to look short-term.

When the house payment increased, sometimes dramatically, under the terms of the adjustable-rate-mortgage contract, borrows began defaulting on their payments. Once in default, it became impossible to refinance to a fixed rate mortgage, which ultimately led to foreclosure.

How do you avoid the ARM plague? It's quite simple.

Avoid taking out an Adjustable Rate Mortgage in the first place, especially if you are not financially secure to do so.

With a Fixed Rate Mortgage, you will know exactly what your house payment will be all the way through the life of your loan. If a fixed rate payment is too high for your income, then you must become realistic and consider your options:

  • Consider purchasing a less expensive home
  • Make a higher down-payment, if you have the funds
  • Wait for the interest rates to drop again-but that's a gamble, or
  • Improve your financial status

Although it can be a challenge (and you may have to make some sacrifices to your normal spending habits), a variety of methods to improve your financial status include getting a better paying job, paying off as much debt as possible, making sure to keep your credit intact by paying all your bills on time, and building a savings account for your new home fund.

Consider, also, your age. It's important to plan if, how, and when your retirement income will factor into your home loan. The less money you borrow, the more equity you build in your home. The faster you build equity, the sooner your home will become 100% yours.

Make sure you consult with your financial advisor to thoroughly plan what is best for your family's situation. In the end you will be far better off by avoiding the ARM plague altogether. Borrow the least amount possible, with a fixed rate mortgage. Remember the less you borrow the more equity you build in your home, the sooner your home will become 100% yours. Sounds simple, right?

Americans, in general, are somewhat cavalier with our finances. We have become a "borrowing society." We tend to mortgage everything to the hilt, have high debt in credit cards, and huge car loans.

Many have suggested that perhaps Americans shouldn't rush so fast into homeownership. In other countries, it is customary for children to live with their parents, grandparents, or siblings until they have saved enough money to pay cash for their homes. We could gain freedom from the mortgage "ball and chain" and take some time to savor what's really important in life...our family, friends, and a better chance to do a little good will for others.

While this may not be likely to happen (and who doesn't yearn for independence?), people everywhere will benefit by taking all credit seriously. A home is likely to be the largest asset in most families, backed with the largest debt. Shouldn't it deserve the most scrutiny and good judgment?

While we would encourage you to avoid the Adjustable Rate Mortgage like the plague, our intent is not to give specific financial advice. Always consult with your financial advisor to thoroughly plan what is best for your situation. Proper planning is the ultimate key to how successful you are with making the right decisions when building or buying a home.

There may even be occasions when an ARM is appropriate. If you are planning to own the house for just a year or two, for instance, and you are absolutely certain you will be able to sell the house and retire the mortgage before the introductory rate jumps.

Just remember, the best-laid plans can change. Is it worth the gamble?

But now, for the moment...