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Are Adjustable Rate Mortgages a scam?

Written by
David Watermeier
October 2, 2022

The short answer to this question is no. They are just mortgage loans that can adjust up OR down during the life of the loans. ARMs are generally considered a big red flag for people planning on getting a mortgage loan in 2022. This is partially true because of the housing bubble of 2007. Many people were taken advantage of and put into adjustable rate mortgages (ARMs) that they couldn’t afford if rates increased. When rates increased, and home values plummeted, this became one of the factors that led to massive foreclosures. Since then, many government regulations have been added to prevent something like this happening again.

Adjustable rate mortgages are a tool to use depending on the goals of the person getting the loan. Tools can be used in your favor or against it. This is another reason why we are adamant that every mortgage loan should be tailored to each individual. They are not one size fits all like you will get when you try to get loans from big online lenders, where you get ripped off on plans where your best interest, and “interest”, isn’t taken into consideration.

Here is some general information about Adjustable Rate Mortgages (ARMS):

  1. ARMs can adjust up or down during the life of the loan. The lending companies do not set the rates.
  2. There are many types of adjustable rate mortgages, they adjust depending on the type that you choose. For example, they can adjust every year, every 5 years, every 3 years, etc.
  3. There is a maximum amount that the interest rate can adjust to, regardless of the market rate of the current loans. For example, if interest rates rise to 10%, but the ARM has a ceiling of 9%, then 9% is what you will pay.
  4. ARMs have a floor as well, so they can only go down to a certain number.
  5. ARMs have a maximum amount that an interest rate can change during one cycle of interest rate adjustment. For example, if interest rates skyrocket 5%+ in one year, but your maximum adjustment is 2.25%, then your rate won’t change dramatically. This is to prevent you from a payment shock, where you suddenly can’t afford the increased mortgage payments.
  6. Generally speaking, the longer the rate is fixed for, the HIGHER the rate would have to be. This is because the lender would have to guarantee a maximum amount of profit they can make from your loan. Which is why ARMs usually have lower interest rate starting points than a 30-year fixed rate mortgage.

With the right lender, they will help you choose whatever loan option works best for your lifestyle. For what is likely the most important purchase of your life, you should have a lender that makes sure you get exactly what you want and need.

For more information or to get pre-approved please contact David Watermeier (NMSL #2278016). If you are planning on buying a home now or within the next 5 years, it's best to start planning immediately.

Cell phone: 714-989-3252