We were at a dinner party on Saturday night with a friend who bought his house about three years ago, financing it with a 5-year ARM. Eventhough he’s got another couple of years left before his rate would readjust (presumably upwards), he’s getting ready to refinance with a 30-year fixed in the next few weeks. Even though a 30-year fixed rate back then would have probably been around 5.5% (as opposed to 7% today), in this case the bet paid off for him. He couldn’t have afforded to buy the house at the time without using an ARM; now he’s making a good deal more money than when he first bought, and is willing to pay a little more for the security of knowing his rate won’t get jacked up to 9% in a couple of years. Not everyone’s so lucky, as yesterday’s Times article on the topic points out. Some people in a strong financial position used ARMS smartly to lower their monthly costs with the knowledge they could always just pay off the loan with cash if the rate rose too much. Others, like Inga Rogers, the hairstylist from Boston, are finding their backs to wall, unable to carry the new monthly costs after her rate jumps from 3.875% to 6.875%. Interestingly, New York City has a higher rate of ARMs than the rest of the country (57% versus 48%) but the potential threat is mitigated somewhat by a high proportion of wealthy owners; in addition, the higher turnover rate in portions of the NYC market make ARMs often a suitable choice. Are any readers finding themselves or close friends facing a potentially dire situation because of an ARM? We hope not.
It Seemed Like a Good Bet at the Time [NY Times]
Doubling Down with a Second ARM [Brownstoner]
Illustration by Ross MacDonald.