Understanding Today’s ARMs – Not the Spring-loaded Trap of the Subprime Era

Are you building a home, with post-pandemic construction delays? Worried about where your permanent mortgage rate will land? Maybe you’re looking at a Jumbo loan, where you’ll really feel today’s rising rates if you locked for 30 years.

In either scenario, there are only a few ways to control the rate you lock at. The more expensive way is to prepay points. The possibly more advantageous way is to consider an Adjustable Rate Mortgage (ARM) with a generous year-long lock.

But Wait – Aren’t ARMs Spring-Loaded Traps?!

It’s true that ARMs got a deservedly bad rap during the sub-prime lending bonanza of the ‘08s. That’s because many of them truly were “spring-loaded traps” designed to maximize returns to the lender and minimize options for borrowers. The two main characteristics that held homeowners down were the lack of a prepayment option and fat margins fixed for the life of the loan.

Consumer Protection In Lending

Thanks in part to the 2010 Dodd-Wall Street Reform Act, some of the riskiest features – prepayment penalties that keep borrowers locked into loans with expensive terms – are gone.

In other words, prepayment is a mandated option. You can always refinance.

Loans that qualify applicants on artificially low rates are no longer allowed. Further, to keep loans affordable, there are caps and lifetime limits in place to prevent predatory margins and rate increases. Today’s ARMs are available in 3, 5, 7 and 10 year introductory rate spans with subsequent annual adjustments.

So depending on your risk tolerance, an ARM can be an instrument for strategic consideration, especially on larger loan amounts, where the initial rate can equal substantial savings, often saving as much as a percentage point compared with current conventional interest rates.

What Are You Assuming With an ARM Today?

There are two main assumptions an ARM borrower would be making today:

1. That if the economy enters a recession, the Fed will likely respond by lowering interest rates, which is its primary control measure.
2. Grand Rapids is uniquely poised to be largely unaffected in terms of overall housing value and growth despite any future economic recession.

Many national and local economists believe both to be true. A strategic consultation may help you determine whether or not an ARM is the right move for you.