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The Risks and Rewards of ARMs

Adjustable-rate mortgages (ARM) are making a resurgence, despite lingering negative associations some borrowers may have for the product post-crisis. A new Washington Post story explores the renewed popularity of ARMS, and how the modern versions differ from their predecessors.

Ann Thompson, a Retail Sales Executive for Bank of America in San Francisco, told the Post, “ARMs became a four-letter word after the housing crisis. They got a bad rap and were lumped in with ‘pick-a-payment’ loans, which allowed people to pay as little or as much as they wanted on their mortgage.”

According to Ellie Mae data, ARMs made up 8.6% of new loans originated in January 2019, compared to only 5.5% in January 2018. That percentage decreased to 7.6% in February 2019. Many modern ARMs fall under the "hybrid" umbrella, featuring "a fixed period followed by annual adjustments in the rate," the Post explains. The Post also spotlights how modern ARMs factor in borrowers' ability to make payments after future rate adjustments—a critical consideration when managing risk.

“Typically, lenders want at least a 10% down payment and they want a FICO score of 700 or above,” said Shawn Sidhu, a mortgage consultant for C2 Financial. “These loans really favor borrowers with an excellent credit profile.”

As reported by the Post, borrowers leading up to the crisis were often "approved for ARMs without a down payment and with little documentation of their income and assets, which meant they lacked the equity to refinance and faced unsustainable payments when their rates increased."

To help avoid default, Claudia Mobilia, SVP of Operations for Embrace Home Loans notes that borrowers should obtain a disclosure form that shows them what their maximum payments could be.

“They need to talk to a lender to make sure they know how long the rate is fixed in the beginning, what their payment could be at the first adjustment and how high the payment can go,” Mobilia said. "I don’t recommend ARMs for first-time buyers because they may not understand the risks."

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.
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