Are Adjustable Rate Mortgages "Bad"?

Posted on May 08 By Justin McHood

Are adjustable rate mortgages "bad"?


No, they are not.

There is nothing inherently bad about an adjustable rate mortgage -- regardless what you may have seen on the evening news recently.

There are all kinds of adjustable rate mortgages: 3/1, 5/1, 7/1, 2/28 -- just to name a few. And each loan product has a different use for a different person who may be in a different situation.

And generally speaking, the only time I have seen an adjustable rate mortgage be "bad" is when a homeowner gets into an adjustable rate without understanding the risks associated with the loan. Occasionally, I suppose that the 2/28 adjustables could be argued as "potentially bad" but there isn't really anything "bad" about them for someone who understands them.


The reason I bring up the fact that there isn't anything really bad about adjustable rate mortgages is that the 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.97 percent according to the latest Freddie Mac press release, with an average 0.7 point, down from last week when it averaged 4.00 percent. A year ago, the 5-year ARM averaged 4.90 percent.

"Treasury bond and note yields declined this week, and rates on fixed-rate mortgages and hybrid ARMs followed suit," said Frank Nothaft, Freddie Mac vice president and chief economist. "Rates for both the 30-year and 15-year fixed-rate mortgages were the lowest in six weeks; initial rates on 5/1 hybrid ARMs hit an all-time low since they were added to the survey in the beginning of 2005.

With rates this low, are adjustable rate mortgages "bad"?

Only if you don't know what you are getting yourself into.

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