Today’s ARMs are markedly different from those of yore – namely during the Great Recession of 2008, Fleming stressed. “While ARMs were a symbol of the housing market crash, today’s ARMs are very different,” he said.
“They offer reduced risk of significant payment shock when the fixed-rate period ends and rates become adjustable. As long as the ‘spread’ between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power ‘boost’ over the 30-year, fixed-mortgage rate.”
Considering current market conditions, Fleming joins a growing chorus of experts espousing ARMs as an alternative to inflation’s corrosive economic effects. In an interview with Mortgage Professional America last month, 40-year industry veteran Melissa Cohn, regional vice president of William Raveis Mortgage, also talked up ARMs as a mitigating alternative. Like Fleming, she contrasted ARMs of today with those 15 years ago.
“That’s like talking about the Old World,” she said at the time. “Adjustable rates are a very different animal today. The adjustable-rate mortgages that gave ARMs a bad name and reputation were loans with which monthly payments were not sufficient even to cover the interest that was due on the mortgage and the loan negatively amortized, meaning that each payment you made was only a partial payment of the interest due. Instead of paying down your mortgage, the principal balance grew each month. Those mortgages don’t exist today, except in very rare exceptions.”
Today’s version is decidedly different, she added. “Adjustable-rate mortgages today are loans that amortize,” she said. “They walk, talk and act like a fixed rate for the initial rate period.”
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