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Largely gone are option ARMs and loans with very low “teaser” rates that quickly exploded into payments that borrowers couldn’t afford. Lenders during the bubble years also qualified borrowers based on teaser rates, increasing the likelihood of default.

“The ARM products that remain in the marketplace today…are really venerable, long-dated products,” the most popular of which is the 5/1-year ARM, said Keith T. Gumbinger, vice president of financial publisher HSH.com.

New federal regulations taking effect this month should further curtail some of the riskier ARMs, including interest-only products and those with balloon payments.

Adjustable-rate loans may work for some buyers, such as a family in which one parent will return to work after staying home with the kids, said Gary Kalman, an executive vice president with the Center for Responsible Lending.

“I don’t think the product, in and of itself, is inherently a bad product,” he said.

Of course, rates could adjust downward in favorable market conditions. But ARMs are still riskier than fixed-rate loans — especially when rates remain at historical lows but are expected to rise.

Shuken, the Mar Vista borrower, says he understands the risks. He plans to pay down some principal before such payments are required, he said. And he’ll start planning years before the interest rate adjusts to either restructure the loan or sell the house.

“If people aren’t thinking about that,” he says, “they need to.”

©2014 Los Angeles Times
Distributed by MCT Information Services

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