ARM conditions can be a mystery to some

  • The Wall Street Journal
  • Saturday, March 18, 2006 9:00pm
  • Business

Many Americans are confused about the terms of their adjustable-rate home mortgages and underestimate the amount by which their loan payments could jump, according to a new study by Federal Reserve Board economists.

The study found that about 35 percent of people with adjustable-rate mortgages didn’t know how much the rate could increase at one time, and 41 percent weren’t sure of the maximum rate they could face. About 28 percent didn’t know which index of interest rates would be used to determine their adjustments; many others gave incorrect answers, such as the consumer price index or “the going rate.”

The study, by Fed economists Brian Bucks and Karen Pence, says people with low incomes and less education are more likely to be unsure of the terms of their mortgages.

Most Americans still finance their homes with fixed-rate mortgages, which are simpler to understand and shield borrowers from the risks of surges in interest rates. But adjustable-rate mortgages have been popular in recent years, largely because they offered low initial payments, helping some people buy homes that otherwise might have been out of reach.

Adjustable-rate loans, also known as ARMs, accounted for about a third of mortgages granted in 2004 and 2005, up from an average of about one-quarter in the 1990s, according to the Mortgage Bankers Association, a trade group based in Washington. In recent months, however, the rise of short-term rates has greatly reduced the attraction of ARMs, and more borrowers are choosing or switching to fixed-rate loans.

Many of the ARMs granted in recent years carry a fixed interest rate for an initial period, which typically ranges from two to 10 years. A large share of such loans also allow borrowers to pay only the interest at first, leaving principal payments for later.

Borrowers who take such loans often don’t fully understand the risks of eventual leaps in their monthly payments, says Stella Adams, executive director of the North Carolina Fair Housing Center, a nonprofit group that helps low-income people with housing problems.

“What they’re told (by loan officers and brokers) is, ‘Don’t worry about it because you can refinance before the adjustment hits,’ “ Ms. Adams says. But that isn’t always possible for borrowers with heavy debt loads and little equity in their homes. Part of the problem, she says, is that borrowers are too trusting: “Consumers think that if the broker says I can afford this, (then) I can afford this.”

Another problem is that borrowers often choose their loans largely based on the initial monthly payments rather than carefully studying which loan would be in their best long-term interests.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

A closing sign hangs above the entrance of the Big Lots at Evergreen and Madison on Monday, July 22, 2024, in Everett, Washington. (Ryan Berry / The Herald)
Big Lots announces it will shutter Everett and Lynnwood stores

The Marysville store will remain open for now. The retailer reported declining sales in the first quarter of the year.

George Montemor poses for a photo in front of his office in Lynnwood, Washington on Tuesday, July 30, 2024.  (Annie Barker / The Herald)
Despite high mortgage rates, Snohomish County home market still competitive

Snohomish County homes priced from $550K to $850K are pulling in multiple offers and selling quickly.

Henry M. Jackson High School’s robotic team, Jack in the Bot, shake hands at the 2024 Indiana Robotics Invitational.(Henry M. Jackson High School)
Mill Creek robotics team — Jack in the Bot — wins big

Henry M. Jackson High School students took first place at the Indiana Robotic Invitational for the second year in a row.

The computer science and robotics and artificial intelligence department faculty includes (left to right) faculty department head Allison Obourn; Dean Carey Schroyer; Ishaani Priyadarshini; ROBAI department head Sirine Maalej and Charlene Lugli. PHOTO: Arutyun Sargsyan / Edmonds College.
Edmonds College to offer 2 new four-year degree programs

The college is accepting applications for bachelor programs in computer science as well as robotics and artificial intelligence.

FILE — Boeing 737 MAX8 airplanes on the assembly line at the Boeing plant in Renton, Wash., on March 27, 2019. Boeing said on Wednesday, Feb. 21, 2024, that it was shaking up the leadership in its commercial airplanes unit after a harrowing incident last month during which a piece fell off a 737 Max 9 jet in flight. (Ruth Fremson/The New York Times)
Federal judge rejects Boeing’s guilty plea related to 737 Max crashes

The plea agreement included a fine of up to $487 million and three years of probation.

Neetha Hsu practices a command with Marley, left, and Andie Holsten practices with Oshie, right, during a puppy training class at The Everett Zoom Room in Everett, Washington on Wednesday, July 3, 2024. (Annie Barker / The Herald)
Tricks of the trade: New Everett dog training gym is a people-pleaser

Everett Zoom Room offers training for puppies, dogs and their owners: “We don’t train dogs, we train the people who love them.”

Andy Bronson/ The Herald 

Everett mayor Ray Stephenson looks over the city on Tuesday, Jan. 5, 2015 in Everett, Wa. Stephanson sees  Utah’s “housing first” model – dealing with homelessness first before tackling related issues – is one Everett and Snohomish County should adopt.

Local:issuesStephanson

Shot on: 1/5/16
Economic Alliance taps former Everett mayor as CEO

Ray Stephanson will serve as the interim leader of the Snohomish County group.

Molbak's Garden + Home in Woodinville, Washington will close on Jan. 28. (Photo courtesy of Molbak's)
After tumultuous year, Molbak’s is being demolished in Woodinville

The beloved garden store closed in January. And a fundraising initiative to revitalize the space fell short.

Everett Mayor Cassie Franklin, Advanced Manufacturing Skills Center executive director Larry Cluphf, Boeing Director of manufacturing and safety Cameron Myers, Edmonds College President Amit Singh, U.S. Rep. Rick Larsen, and Snohomish County Executive Dave Somers participate in a ribbon-cutting ceremony on Tuesday, July 2 celebrating the opening of a new fuselage training lab at Paine Field. Credit: Arutyun Sargsyan / Edmonds College
‘Magic happens’: Paine Field aerospace center dedicates new hands-on lab

Last month, Edmonds College officials cut the ribbon on a new training lab — a section of a 12-ton Boeing 767 tanker.

Gov. Jay Inslee presents CEO Fredrik Hellstrom with the Swedish flag during a grand opening ceremony for Sweden-based Echandia on Tuesday, July 30, 2024, in Marysville, Washington. (Ryan Berry / The Herald)
Swedish battery maker opens first U.S. facility in Marysville

Echandia’s marine battery systems power everything from tug boats to passenger and car ferries.

Helion Energy CEO and co-founder David Kirtley talks to Governor Jay Inslee about Trenta, Helion’s 6th fusion prototype, during a tour of their facility on Tuesday, July 9, 2024 in Everett, Washington. (Olivia Vanni / The Herald)
State grants Everett-based Helion a fusion energy license

The permit allows Helion to use radioactive materials to operate the company’s fusion generator.

People walk past the new J.sweets storefront in Alderwood Mall on Thursday, July 25, 2024, in Lynnwood, Washington. (Olivia Vanni / The Herald)
New Japanese-style sweets shop to open in Lynnwood

J. Sweets, offering traditional Japanese and western style treats opens, could open by early August at the Alderwood mall.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.