Adjustable-rate mortgage vs. fixed-rate mortgage: ‘It’s amazing what people don’t know about mortgages’

MarketWatch - Leslie Albrecht

August 2, 2022

“It’s amazing what people don’t know about mortgages,” says Ken Waltzer, principal and co-founder of KCS Wealth Advisory in Los Angeles. He said he’ll ask clients considering ARMs about two key numbers related to their loan — the index and the margin — and he’ll get blank stares in response.

In addition to understanding those figures, borrowers thinking about an ARM should first find out how soon their payment could go up, and — perhaps most importantly — whether they “will still be able to afford the monthly payment if the rate and payment go up to the maximums allowed under the loan contract,” according to the Consumer Financial Protection Bureau, a federal consumer watchdog. (And remember that the mortgage payment is just one piece of your total housing costs; there’s also homeowner’s insurance and property taxes, and sometimes mortgage insurance and HOA fees. Homeownership typically requires repair and upkeep costs, too.)

“You just need to be careful because there might be periods where rates go super high and you’re paying 10% for a year or two,” Waltzer said. “You need to know if that’s possible.”

You may remember adjustable-rate mortgages from the subprime foreclosure crisis that preceded the 2008 housing crash and Great Recession. ARMs were popular with buyers looking to get a piece of the housing boom (which turned out to be a bubble). Lending standards were looser in those days, leading to situations where lenders approved mortgages for borrowers even if they couldn’t actually afford to pay it off, experts told MarketWatch. “Back in 2006, if you were able to fog your mirror, you could get a loan,” Waltzer said. “Now you actually have to qualify.”

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