SAINT LOUIS, MO (KMOX) - With mortgage rates climbing, new reports show more home buyers are taking a chance on Adjustable Rate Mortgages (ARMs).
Nik Bundalo, finance lecturer in the Southern Illinois University Edwardsville School of Business, says the lower starting rate can make an adjustable rate mortgage more affordable in the first years, "but the trade-off is that in five, seven, or ten years, whenever the fixed rate period expires, you don't know where the rate is going to be and where the payment is going to be at that time."
Bundalo adds once the fixed rate period of an Adjustable Rate Mortgage (ARM) expires, some homebuyers could run into an issue of not being able to afford higher payments if the market rate has gone up. "Often people may think, 'well I'll just go ahead and refinance'. That is also not a guarantee because at that time home values could potentially decrease, there may not be enough equity to refinance and obtain a new loan, and folks may not quality at that time because their income is lower, maybe their credit score is lower."
He does point out, today's underwriting standards are more robust to try and avoid a crisis of failed mortgages like was seen two decades ago.
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