Negative Press aside, ARMs can be a great benefit to the economy. While they received their fair share of criticism and blame in the recent market collapse, they are not a negative thing in themselves. They are a tool. Like any tool, used incorrectly they can (and did) have disastrous results.
For the investor an ARM gives greater leveraging power. They are betting that the price will increase quickly allowing them to sell before the interest rate raises. This is a gamble of course, and like most things a higher pay-off is usually balanced with a higher risk.
For the frequent mover an ARM can give them higher buying power. They know they will be selling before the rate goes up so the monthly payment is lower during the time they live there. The risk is that if the market drops they may not be able to sell quickly (sound familiar?).
For the buyers that KNOWS their income will increase in the near future the ARM can allow them to purchase that dream home rather than passing on it and waiting until the money comes in. The least risky group here is someone who’s income is temporarily reduced rather than one betting on a raise.
According to CNN Money during the boom ARMs were used in nearly 70% of the mortgages written. During the bust their usage dropped to less than 3%. Today they are back up to 5% and climbing, with 10% expected by year’s end according to Freddie Mac.
Our take on what it means to YOU? Like any tool, misuse can create problems. We do think the ARM is a great tool if use properly, if one understands the risks involved AND is able to absorb the loss if the gamble fails. The use of ARMs can speed the rate of recovery for our market, and therefore the economy in general. AND that benefits us all!
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