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Adjustable-Rate Mortgages Return with a More Conservative Look

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By Jeff Collins

Brokers say that adjustable mortgage users tend to be savvier and more willing to tolerate risk. In general, ARMs also are more common on “jumbo” loans, or loans for more than $625,500, where the rate difference is even greater. Unlike smaller loans, jumbos can’t be sold to the government-backed Fannie Mae and Freddie Mac.

“It’s totally up to the attitude of the client,” said Paul Scheper, a division manager for Greenlight Loans in Irvine, Calif.

Today’s ARMs are a far cry from the exotic, high-risk loans of the housing bubble, brokers say. In many cases, homeowners received loans with artificially low “teaser” rates that eventually adjusted to payments they couldn’t remotely afford.

Owners expected rising home prices to bail them out of those loans before payments adjusted upward. But when home prices stopped climbing, the market collapsed, pushing millions of homes into foreclosure.

Today’s ARMs don’t include “teaser rates” and have more stringent requirements — such as minimum down payments and high credit scores. Even-tougher lending standards take effect in January.

In addition, the most common ARM today is a hybrid that combines features of both fixed and variable-rate loans, Scheper said. Loan rates remain fixed for a set period — five, seven or 10 years — then adjust once a year after that. Such loans also have a cap on yearly increases, plus an overall lifetime cap.

But when rates go up, so do payments.

Adjustable mortgages may make sense for borrowers planning to sell a home within five to 10 years, for those who can afford higher payments or for young professionals expecting to see their income grow, brokers said.

©2013 The Orange County Register (Santa Ana, Calif.)
Distributed by MCT Information Services

 

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