Adjustable Rate Mortgages Make a Comeback

Libby Kane
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House Sold for ARMAfter taking a post-recession beating, ARMs are back.

Adjustable rate mortgages, the housing loans with variable interest rates after an initial period at a fixed rate, don’t exactly boast the best history.

Their popularity peaked right before the 2008 housing crisis, when banks and mortgage brokers used low initial rates to entice borrowers into signing on the dotted line. The problem was that once the initial fixed-rate period was over, the rate hikes created higher mortgage payments that became unsustainable for many homeowners.

Now, ARMs are back in demand. The Wall Street Journal reports that lenders are again recommending these mortgages—but this time, they are focused on a different demographic.

According to the Journal, 31% of the mortgages between $417,001 to $1 million that were taken out in fourth quarter 2013 were ARMs—the highest percentage since the third quarter of 2008. And the increase is consistent as the price tag goes up: For mortgages over $1 million, 61% were ARMs—56% higher than a year ago.

Lenders say they’re now targeting borrowers with good credit who are pursuing “jumbo” mortgages (mortgages that are larger than the annual guidelines set by the Office of Federal Housing Enterprise Oversight), rather than subprime borrowers, as was the case before the recession. While jumbo mortgages are riskier than traditional ones, they aren’t as problematic as subprime mortgages, which are granted at high interest rates to borrowers with low credit scores.

For lenders, the appeal of an ARM is the hope that interest rates will rise enough after the introductory, low fixed period to make up for their lost interest payments; for the borrower, the appeal is exactly the opposite. And while few people could condemn the idea of offering borrowers with good credit a seemingly more affordable mortgage, there are indications that some smaller lenders are, in fact, targeting people who may be less able to afford them, including retirees looking for low rates.

So what’s the best way to protect yourself against a mortgage that’s ill-suited for your situation? Maintain a strong credit score, and have a solid understanding of how mortgages work.

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