Dave Says: Adjustable Rate Mortgages

Dear Dave,

Considering all the market volatility, why do banks offer adjustable-rate mortgages? How did they come into being?

- Anonymous

Dear Anonymous,

I was in the real estate business in 1978, and that was the year fixed-rate mortgages went to 10 percent for the first time in history. It created all kinds of chaos, but that wasn’t the worst of it all. By 1981, rates were as high as 17 percent. Banks were paying 10 to 12 percent on savings accounts, but they were making just five percent back from their products. Essentially, banks began looking for a way to prevent themselves from losing money in the future. Out of that, the adjustable rate mortgage was born.

With the adjustable-rate mortgage (or ARM), banks offer a lower interest rate in the beginning to grab your attention. Then, when rates adjust they adjust up. It transfers risk to the consumer and puts the homebuyer in a position where they’re at the mercy of the markets when it comes to the amount of their mortgage payments.

Adjustable rate mortgages are a bad, bad deal. If you currently have one I’d encourage you to refinance now!

- Dave