Question:

What are the dangers of adjustable rate mortgages?

Answer:

Well, it depends. It is easy to say that dangers of adjustable rate mortgages are so great one should never consider them. It is also true that a great percentage of home foreclosures falls on the ARMs. However, it is both lenders and borrowers fault that so many adjustable rate mortgages turn problematic and put borrowers' homes in danger.

Dangers of Adjustable Rate Mortgages

The greatest danger of getting an adjustable rate mortgage is the increase of the monthly payment after the initial low rate fixed period is over. Many borrowers approach the process of taking a mortgage loan without educating themselves first. The thing that they only notice about ARMs is that they usually have much lower rates and monthly payments compared to fixed rate mortgages.

While it is true that the flexibility in payments offered by adjustable rate mortgages is irresistible to experienced investors and homebuyers, many first-time homebuyers are terrified when they notice the increase in the principal and monthly payment when the fixed period of minimum payment option adjustable rate mortgage ended. Perhaps the lender explained what the risks were, but often either the lender did not inform the homebuying newbies, or they didn't listen fascinated by the great luxurious home they could buy with that great adjustable rate mortgage.

Another danger of the adjustable rate mortgages is that lenders would often slip in provisions for prepayment penalty period longer than the fixed rate period of the ARM. That is, if you are taking a 3/1 ARM, you shouldn't have prepayment penalty period longer than the three years the ARM rate will stay fixed. Borrowers often do not pay attention how costly it would be if they wanted to refinance within the prepayment penalty period; sometimes so costly that it's not worth it.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
Was this Mortgage QnA helpful?
Not at all
  • Currently 3/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Definitely
Add to this Answer

Mortgage QnA is not a common forum. We have special rules:

  • Post no questions here. To ask a question, click the Ask a Question link
  • We will not publish answers that include any form of advertising
  • Add your answer only if it will contrubute to the quality of this Mortgage QnA and help future readers
If you have trouble reading the code, click on the code itself to generate a new random code. Verification Code Above:
Bookmark and share this QnA: