Use Of ARMs is going up
Use of adjustable rate mortgages (ARMs) has increased from 3% to 10% the past two years
Why are people using them?
Adjustable rate mortgages are attractive relative to fixed rate mortgages because they have a lower interest rate.
Lower rates? Why do lenders offer them?
Lenders have a problem. They borrow money short-term but lend it long-term. That means they are taking a lot of risk.
Lenders don't like risk
To reduce the risk lenders buy different financial products. This is costly. Therefore, the interest rate for fixed loans includes these costs.
ARMs solve the lenders problems
The interest rate on the adjustable rate mortgage adjust frequently and is closer aligned to the cost the lender pays to borrow the money. Problem solved.
Lower risk means...
Since lenders have lower risk with adjustable rate mortgages, they give you a lower interest rate...
Where does the risk go?
The lender can drop the rate because you are now taking on the risk instead of them!
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