Even though house prices have been going up and up, mortgage rates have stayed somewhat low. The problem with this is you end up with people purchasing homes that they really can’t afford based on what they think their interest rate is going to be. The ARM allows a consumer to take on a mortgage with a lower interest in the beginning, and hence feel that they can make the payment. However, as the ARM’s interest rate increases, it gets tougher and tougher for the consumer to make their monthly payments.
A recent study found that most ARMs are still going to people in the lowest income categories, who really cannot afford to gamble with their monthly payments. Once those interest rates start going up, they are going to have to sell their home as they will no longer be able to afford it. Ten years ago the higher interest groups were the ones with the ARMs and could handle the risk of a higher interest rate later on. The study found that in 1992, 40 percent of the borrowers on an ARM were in the wealthiest class. This is a major switch from today’s borrowers.
If a borrower does not have flexibility in their budget, then this loan is not for them – because sooner or later, they will not be able to afford it. ■
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