Are ARM’s Always a Bad Idea? When Are They Good?
Foreseeable Increase in Income
No, ARM’s are not always a bad idea. In many instances, they are very appropriate. The most common example of an appropriate scenario is when the borrower has limited monthly cash available to make a mortgage payment, however there is a clear and foreseeable expectation that monthly resources will permanently increase, thereby making the mortgage more easy to afford. In that case, an ARM may be appropriate because it allows the borrower to pay a lower amount in the beginning year or two of the contract, and then a higher amount when the money is actually there.
Real Estate Investments
A second example of a very common reason for a borrower obtaining an ARM is when the property purchased is as an investment. If a borrower intentionally purchases a home with the clear intention of flipping it very soon, then a lower initial monthly payment would be good because that borrower knows that he will not be subject to the potential increases in monthly payments, simply because he will have sold the property long before the mortgage realizes any increase in current interest rates.
