As rising interest rates cool off the once red-hot housing market, a growing number of homebuyers are turning to more risky adjustable rate mortgages--or ARMs. These variable mortgages can offer buyers a much lower rate to start with, even with the chance of rising significantly later on. In recent years, ARMs had largely fallen out of favor because of their risky nature and buyers wanting to lock in historically low fixed rates. But with rates going up and more volatility ahead, ARMs have become an option for certain buyers to get into a home at a more affordable rate.
GP Theriot, Texas-based real estate advisor, says adjustable rate loans are not quite as risky as they used to be. "They've gotten smarter and have fine tuned these ARM products to where there's a live cap...meaning there's a certain rate it cannot go above anymore," he tells KTRH.
Theriot notes these loans, while risky, can work for some buyers. "If you know you're not going to be in a house for more than ten years, then a seven-year ARM would make sense, because you know you're going to be out of there," he says.
Still, he recommends a fixed rate loan for most buyers, since they can treat it as a de facto adjustable rate. "We tell people fall in love with the house, but date the rate," says Theriot. "Meaning that you can refinance this at any time and get a better rate."
Some critics blame variable rate loans for causing the housing crash of 2008-09, but Theriot argues the crash was not because of adjustable rate loans, but bad subprime loans. "We were giving bad loans back then, I'll admit it," he tells KTRH. "Bad loans given to people who had no business getting them in the first place."
"Look, the ARM is not for everybody...some people hear adjustable rate mortgage and it scares them, and I get that," he continues. "But if you've got the risk tolerance, it can be an outstanding product for the right person that knows what they're getting into."
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