What Happened to The ARM?

The ARM Loan

During the height of the boom years in the real estate market, the ARM loan was most popular nearly 70 percent of the loans issued were ARMs.  The ARMs were marketed to the borrowers as an opportunity to purchase a home, making very low monthly payment for the first year or two.  What many borrowers failed to understand was the escalation clauses in the loans.  Most borrowers felt in a year or two they would be in a better financial situation, and would be able to handle the increased monthly mortgage payment. 

When the economy took a down turn, the ARMs all but disappeared.  The ARMs were considered toxic and a major contributor to the housing market collapse.   The ARM became a leprosy.

A recent article by CNN Money (Feb. 14, 2011) states the ARM has returned to the market place, and nearly five percent of the loans issued are ARMs.  The initial interest rate is lower than the 30 year fixed, but of course the rate escalates.   The ARM would attract I would think, a specific type of borrower.   Perhaps a buyer who knows they will not be in the house for too long.

 However, these days I think most borrowers would choose a 30 year fixed loan , as they  will feel a lot safer knowing what their monthly payment will be over the life of the loan.