Too Broke To Pay Attention

Thoughts on personal finance and how to avoid having it take over your life

The commercials for ARMs are back

16 Feb 2012

Something that people seem to be able to agree upon re the financial/mortgage crisis was at least aggravated by people being unable to refi or handle the increased payments when their ARM adjusted upwards. Remember, ARMs were often sold to people who often couldn’t afford to pay the house payment on a straight 30 year repayment mortgage so ARMs offered a cheaper way into a house on the implicit or explicit assumption that the buyer would be able to either refi the mortgage before the ARM would reset, flip the house before the ARM resets or suddenly earn a lot more money before the ARM resets.

Well, we know how that particular movie ended.

Now we’re at extremely low interest rates – which should make an ARM less attractive – and I start seeing commercials for ARMs again on TV? Haven’t we learned anything?

Rhetorical question aside, there is exactly one scenario where an ARM makes sense to me. And no, it’s not my own idea, but something Clark Howard mentioned on his show.

Basically, if you’re at the tail end of your mortgage and the interest rate is comparatively high, it might make sense to refi the house using an ARM provided you can overpay it to the extent that you’ve paid it off before the ARM resets rather than take advantage of the “lower payments”. Of course in that type of refi you’re also not trying to cash out any equity in the house, all you’re doing is refinancing the outstanding amount on your existing mortgage.

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