Adjustable Rate Mortgages: Rearing Its U...

We all know the old adage, “If it seems too good to be true, it probably is.”

Well, this tends to be my take on Adjustable Rate Mortgages (ARMs).

Hey Moguls, Jason Lucchesi at your service. You may or may not have noticed, but ARMs have really been making a comeback.

...And I’m NOT the most excited person in the world about this.

Let me tell you why...

Since my background includes experience in the mortgage industry, I feel confident giving my insight on this: I don’t think ARMs are going to be good for us. In fact, I think these could lead to disastrous market issues.

When it comes to ARMs, lenders typically give these to borrowers with exceptional credit. (And that, by the way, was how these were done in the early 2000s too.)

But up until the 2008 market crash, people could get 100% financing with as low as a 580 FICO score. (I know, why did lenders do that... right?!)

So, what does all this mean for investors?

Well, the real estate market is always very cyclical.

After a crash, it begins to improve and correct itself. Then... that’s right – you guessed it – after the improvement, the market begins to decline again, and we see a lot of short sales, foreclosures, etc.

So, for individuals who are getting 2- to 3-year ARMs, this could potentially be devastating (especially if the market turns out to be volatile during that 2- to 3-year time period, with interest rates increasing).

Now, don’t get me wrong – I don’t have a crystal ball. These things could possibly come about, but there’s no guarantee.

I’ve been studying the data, and determining what I think could potentially happen in the years to come. And this is what you should do too!

As you’re coming across property deals (including short sales and foreclosures), make sure you study the data. One of my favorite ways to do this is by browsing RealtyTrac.

But no matter how you go about your research, it’s always best to be informed before you take the risk of investing in a property.

ARM: What’s the harm?

Going back to the topic of ARMs – the reason I DON’T think these are a good idea is because often, the people who get these can’t afford to take out a 30-year fixed mortgage.

arm And, in my opinion, if you can’t afford a 30-year fixed mortgage, it might not be a good idea to be taking out a mortgage at all.

Sure, with an ARM, you have a lower interest payment for 2 to 7 years, but – at the end of the day – it may not work out.

And, having worked with one of the largest mortgage lenders around the 2008 crash, I can tell you that – when mortgages don’t work out, it’s not pretty.

If the market goes south, and your interest rate increases from 6% to 8.5% or 9%, it can be a big struggle for homeowners.

So I would definitely recommend doing your due diligence by studying the market cycles, and being aware of how ARMs can sometimes cause more harm than good.

The Good News: short sales, HUDs and foreclosures can be awesome deals for investors. Just make sure you’re informed and educated before making what could potentially be risky financial decisions.

What’s Your Take?

Where do you see the market headed, and how do you think ARMs will impact this? Hit me up in the comments section below.

Browse websites like RealtyTrac to learn more about the foreclosures in your market.

Check out helpful mortgage-relevant resources such as Mortgage News Daily, MReport, and HousingWire for all the latest info on interest rates, market trends, etc.

Research the history of the real estate market and note any obvious trends that you see; the more informed you are, the better equipped you’ll be to make wise investing decisions.