The financial crisis of 2008 resulted in the failure of many ill-fated mortgages and investments. Several Americans ended up in foreclosure because they agreed to these high-risk mortgages. While adjustable-rate mortgages were initially affordable, the monthly payments increased dramatically over three to five years. The problem with these mortgages is that they do not protect the consumer from the risk of going underwater and resulting in the government bailing out the banks.
According to Investopedia, “An adjustable-rate mortgage (ARM) is a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for a period of time. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or even monthly intervals.”
While ARMs have a reputation for being risky, they have recovered in recent years. While many borrowers opt for adjustable-rate mortgages to save on their payments, borrowers should be aware of the negative side effects of these loans. The financial crisis ruined ARMs by increasing interest rates, and many under qualified borrowers could not keep up with the payments. However, laws passed after the crisis made ARMs safer and more transparent. Now, borrowers are turning to ARMs again to make house payments affordable.
The interest rate jump has also revived interest in adjustable-rate mortgages, which are not the same loans that caused the financial crisis. According to the Mortgage Bankers Association, applications for ARMs increased more than twofold in April compared to a year ago. Last week, 9% of new home mortgages were ARMs. This means that ARMs are now making up almost a quarter of all home loans.