Adjustable Rate Mortgages: A Risky Choice for Home Buyers
SAINT LOUIS, MO (KMOX) – With mortgage rates on the rise, many home buyers are opting for Adjustable Rate Mortgages (ARMs) as a potentially more affordable solution.
Nik Bundalo, a finance lecturer at Southern Illinois University Edwardsville, explains that the lower initial rates of ARMs can provide short-term relief for buyers. However, he warns of the uncertainty that comes when the fixed-rate period (which lasts five, seven, or ten years) ends. Homeowners may face increased payments that they cannot predict.
Bundalo further notes the risks associated with ARMs, emphasizing that once the fixed period expires, rising market rates may make it difficult for some buyers to keep up with their mortgage payments. “Often people may think, ‘I’ll just refinance,'” he says. However, refinancing isn’t guaranteed; home values might decrease, leading to insufficient equity or lower credit scores that could hinder qualifying for a new loan.
Despite the risks, Bundalo reassures that current underwriting standards are much stricter than in the past, which aims to prevent a crisis similar to the mortgage meltdown two decades ago.
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