Adjustable Mortgages
A sensible option, or the long ARM of doom?
By Tim McNellie

With all the turmoil they’ve brought to the financial markets lately, adjustable rate mortgages have become a fourletter word in the minds of many homebuyers. That’s a radical change from just a few years ago, when, during the halcyon days of ultra-low interest rates, an ARM was considered a reasonable option for just about any homebuyer.

Today, they’re widely viewed as reckless, and harbingers of foreclosure and personal financial doom.

“As recently as a year ago, everybody was completely at ease with ARMs. They were not a huge concern” says Sonny Bringol, president of Victorian Finance in Bethel Park. “With the mortgage crisis coming into play, nine out of 10 homebuyers won’t even consider an ARM these days.”

The trepidation is understandable. In recent months, huge numbers of homebuyers with less-than-perfect credit have reached the end of their introductory rate periods – the time frame in which their mortgage payment was based on the interest rate of the day they got their mortgages. When the introductory “teaser” period ends, the rates “reset,” meaning they change to reflect current interest rates. For many, that made their monthly mortgage payment skyrocket, often beyond their ability to pay.

"The real estate market in the South Hills is very stable. In fact, home prices are even edging up. We never experienced the bubble that affected home purchases across the country. There was no over-production here. Realtors in Pittsburgh are very professional. We give buyers and sellers a sense of confidence in the process."
- Connie Hickey, Howard Hanna

But homebuyers shouldn’t automatically object to ARMs, mortgage experts say. Certain people could save money by taking out an adjustable mortgage. This is especially true if someone is only going to be in a house for just a few years.

Taking advantage of those low introductory rates before moving on to a new residence (or refinancing the ARM at a favorable rate) could mean big savings.

There is a serious risk involved, though. What if, for whatever reason, you end up staying in the house longer than planned? Without paying close attention to market conditions and interest rate movements, you could find yourself facing gigantic mortgage payments. “The question I pose to people is: In five years do you know whether you’ll be in that house or not?” Bringol says. “If you will be, don’t expose yourself to the risk [of an ARM]. It’s hard to predict where interest rates will be.”

For those already in ARMs and looking to get out, finding the right moment is a matter of timing. Consider a homeowner who has an ARM at a 4.5 percent rate that is set to re-adjust in two years. If he were to re-finance tomorrow to a 30-year fixed-rate mortgage, his new rate would be about 6 percent, which would immediately raise his monthly payment. The question he must ask is: Between now and two years from now, will interest rates go up or down? If they go down, he can re-finance at a later date. But if rates go up, and he doesn’t re-finance now, he’s going to be stuck paying at an even higher rate than 6 percent.

For the financially savvy, an ARM can pay off big time. For those who want to avoid fretting over their mortgage payments more than they already do, a fixed-rate-mortgage might be the more sensible way to go.

"The Pittsburgh market is unique and a very good place to buy a home. Right now, the factors – low interest rates, stable pricing – are positive. We don’t have wild swings here. Pittsburgh is like a locomotive that keeps chugging along. What we do have is the expertise to know how to personalize a property so that it suits the needs or lifestyle of the buyer. Everything from room enhancements to color coordination to customizing each fixture."
- Grady Gaspar, Regional Marketing Manager, Ryan Homes

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