Question:

What is the history of adjustable rate mortgages (ARMs)?

Answer:

It is curious to know the history of adjustable rate mortgages, how and why they were invented. In fact, adjustable rate mortgages spawned in the early 1980s when rates were as high as 17% and lenders were trying to come up with loan products that people could afford. Among graduated payment plans and different equity loans, the adjustable rate mortgage turned the most popular and became a common mortgage product rather than a temporary scheme.

The adjustable rate mortgages are designed to distribute the risk between the borrower and the lender. Their interest rate is tied to an index and will adjust either up or down, according to the index. In the history of adjustable rate mortgages, many times borrowers would risk a possible increase of the interest rate in exchange for the teaser rate and flexible payment options offered by these loans.

Historically, people have loved taking ARMs because they would qualify for a larger loan amount, or could be making interest only payments on a house they didn't want to keep for long.

Many people take hybrid adjustable rate mortgages (3/1, 5/1, 10/1) to benefit from the lower rates and flexible repayment plans for a limited time and later refinance into a fixed rate mortgage, or sell the house. Remember to negotiate the prepayment penalty of the loan, if any, with the lender - it shouldn't be longer than the fixed period of the ARM so that borrowers could really benefit from it.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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