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Adjustable Rate Mortgages (ARMs)

February 23, 2012

Fixed-rate loans are fairly straight forward and easy to understand. Even loan terms that contain some of the provisions mentioned above are usually more familiar and better understood by potential borrowers. More confusion arises, however, with loans that fall into the category of an adjustable-rate mortgage (ARM). ARM loans differ from fixed-rate loans because the rate can change. ARM loans also differ from one another, depending on when the terms allow the interest rate to change and by how much.

Though ARM loans have recently come under fire from many sources as extremely risky options, these products came about as an alternative to historically high rates from the late 1970s through the mid-1980s. This was a time when interest rates ranged anywhere from 12% to 18%. Due to these high rates, many consumers could not afford, or were unwilling, to take on fixed-rate loans for terms up to 30 years. ARM loans offered another option, not only for borrowers, but also for lenders who were unwilling to lend on a fixed-rate basis due to an economic climate created by the savings and loan crisis.

These ARM loans enabled lenders to offer loans below the market rate and enticed borrowers with the potential for large savings over fixed-rate loans that were at the market rate. Lenders were able to offer ARM loans because they shared the risk with the borrowers, both when the rate increased and/or decreased. However, since these were new products, problems did arise.

There were no protections against rate changes, which resulted in “payment shock” for many borrowers. Those who obtained loans were ill-prepared for larger payments when the interest rate increased. Most modern ARM loans have built-in protections, such as caps (discussed in a subsequent section of the course) and disclosure of the “worst-case scenario” to eliminate the likelihood of payment shock.



First, Complete out a loan application on our website
-Go to
-Click on Apply Now at the top
-Scroll to the middle of the page and Click on 3. Full Application
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