Long (& Costly) Arm of the ARM Mortgage

Letter to Philippians: We’re told “Home Buyers Who Enjoyed Cheap Adjustable Mortgages Are Now Getting a Nasty Shock” in the form of skyrocketing monthly bank bills. Turns out, turning a blind eye to what could happen when signing up for the ARM may have been a haunting strategy for them ...

As the WSJ report summed up the latest bad news for the struggling housing industry, “Payments could rise sharply for tens of thousands of homeowners who financed with ARMs when rates were historically low.” The draw, of course, was that ARMs “offer a discounted borrowing rate for an extended period—typically three to 10 years –before floating to the market rate & continually resetting for the life of the loan, often with restrictions on how much the rate can increase at once.” The complexity & variety of ARM products be damned, the strategy works to the consumer’s advantage when interest rates remain steady or trend downward. What’s been happening to the market in recent months, however, is that mortgage interest rates have been on a steady rise after briefly dipping below 6%. Moreover, many of the ARM mortgages issued since 2020 are in the “jumbo” category to cover the cost of the most expensive homes so any such upward trend in interest rates can make a monthly mortgage payment leap even further.

As the paper explained: “According to Intercontinental Exchange, 186,000 adjustable-rate mortgages [automatically] readjust next year, increasing the monthly payment initially by a median $645, which will eventually turn into $754 after getting through rate increase caps baked into the loans. The largest category consists of people who took out seven-year fixed-period adjustable-rate mortgages in 2020. They face a median monthly payment increase of 43%, or $1,269 a month.”

Davd Soul