Americans Gambling on Rates With Most ARMs Since 2008

[Purveyor]

By Kathleen M. Howley and Prashant Gopal - Jul 24, 2013

Jung Lim plans to offset the cost of rising mortgage rates by using an adjustable-rate loan to buy a home for his expanding family. For the California endodontist, the money he’ll save makes up for the ARM’s risky reputation.

Lim, 38, whose wife is expecting a second child in December, is leaving a two-bedroom condo in Los Angeles’s Hancock Park to buy a four-bedroom house in the city’s Sherman Oaks neighborhood for $1.12 million. His lender offered him a rate for an adjustable mortgage that is about a percentage point cheaper than a fixed loan.

“If I could have gotten a 30-year fixed at the interest rate I’m getting the ARM for, I would have felt a lot more comfortable,” said Lim, who’s also a professor of endodontics at the University of California, Los Angeles. “But I’m hoping to refinance in five years or less. And we’ll be in the house for about 10 years so we could also sell. Hopefully prices have bottomed so we won’t be underwater then.”

In the second year of the U.S. housing recovery, the loans that helped trigger the housing bust are making a comeback. Applications in late June rose to the highest level since 2008 after the Federal Reserve sent fixed rates surging by signaling it may curtail bond buying credited with pushing borrowing costs to the cheapest on record. The average 30-year fixed-rate mortgage jumped 1.2 percentage points in mid-July from May to the highest level in two years, adding about $200 a month to payments on a $300,000 mortgage.

more...

http://www.bloomberg.com/news/2013-07-24/americans-gambling-on-rates-with-most-arms-since-2008.html

[NoOneMan]

1. With record low 30 year fixed, this is ridiculous

Hey, guess what....rates are only going up the moment the taps are cutoff.

Fortunately in this case, home values will probably only be going up too for the foreseeable future.

[exboyfil]

2. They are insane

I refinanced near the low point (actually a second refi but the first did pay for itself before getting the second). Lock in your rates with the cheapest money available. If you need an ARM to purchase with these rates, then you have no business borrowing so much money.

Hopefully we won't be underwater by then???? Wow. He is planning on being in his home long term - get the fixed rate mortgage. Get less house if you need to. Why risk your financial future on hope? You are exposing yourself to both house prices and interest rates. No one has a crystal ball, but why take the risk?