New York, NY (PRWEB) February 20, 2013
Despite low rates, ARMs still a risky idea for long term homeowners say mortgage experts
Adjustable rate mortgages continue to stay below the 3 percent mark even as fixed rate 30-year mortgages hover around the 4 percent mark. An industry survey from Bankrate.com released in mid-February shows 5-year ARMs are up slightly to 2.75 percent and 7-year ARM is 2.98 percent.
Ricky Brava, a senior partner at Apollo Financial Group, says the ARM market is one of the problems which led to the housing crisis. Homeowners bought into the low rates, not fully understanding that rate could, and did, rise which also raised their monthly mortgage payment.
Wall Street-based Apollo Financial Group buys and sells distressed financials.
“An ARM can be a good idea for someone who can fully pay off the mortgage in less than seven years,” he said. “The savings on interest is substantial. But if the homeowner can’t make a payoff in that amount of time, the risk of rising interest rates is very real.”
Many of those who had subprime mortgages in the housing boom of a few years ago had ARMs. The rate was fixed for a few years of the life of the mortgage and they could rise or fall, depending on the mortgage market. Other loans had an adjustable rate which simply rose.
“Borrowers who fully understand the intricacies of mortgages, financing and ARMs and their own financial statues are well-suited to decide if they can handle an ARM,” said Dean Anastos, Apollo FInancial senior partner. “Otherwise, I’d recommend people stay away from an ARM and go with a fixed rate mortgage.”
Short term ARMs in the past were also used by people who would stay in a place only a few years and move. These homeowners capitalized on the low rates and a booming market which would let them sell their house quickly. The short term resident also hoped for an increase in the home value to either make a small profit or offset the costs associated with buying a house.
“That used to be a good idea. Today, not so much,” Mr. Brava said. “The housing market is making some advances and the recovery is underway. But the market is not yet solid enough to allow short term financial gains in buying and selling a home quickly, especially when that home is bought and sold at real market prices.”
The US mortgage market has mostly stabilized over the past year. Foreclosures are down from the recent highs, but still not down to the historical average. Subprime mortgage foreclosures continue to be the driving force behind the high numbers.
“We’re going to continue to see that for a while,” Mr. Anastos said. “Some of the subprime ARMs are just now coming to the point where the rates will go up. When that happens, homeowners are going to have to make some hard decisions.”
Lenders too are going to have some hard decisions to make because a number of these mortgages are also underwater.
“The only thing that can be said with certainty is foreclosures are going to continue to be difficult,” Mr. Brava said. “It will be hard on everyone connected to that mortgage.”