Spring 2011 Mortgage Trends
Handing over house keys
ARMs suit some, but what about you?

Not that a borrower can necessarily predict the future two years out, either. However, Green says, there are plenty of situations where a borrower knows they won't be in the same house in 18 to 24 months.

"If you're starting a family and you know you'll need something bigger, an ARM makes sense for that interim period before you buy," says Green. "Or, if you know for sure that you'll be moving because of work within that time span, it's a good idea to consider an ARM."

The downsides

Make no mistake, ARMs have a big potential downside because the rates can jump, leaving the borrower on the hook for more than if they had gone with a traditional product. "That risk is always there," says Moskowitz. "However, it's a risk that you can and should understand before you take the loan."

There are also risks that are not necessarily inherent to the ARM. For instance, borrowers who choose ARMs in accordance with a specific plan for the next few years always run the risk that their predictions could be wrong.

"You could lose your job, get sick or be unable to move," says Moskowitz. "That's a risk, but that's also just life."

Another risk is using the ARM to buy more house than you can really afford. In the past, ARMs were sometimes used to qualify questionable borrowers because the initial monthly payments were lower than those associated with a 30-year product. Theoretically, it looked like borrowers could afford the house, but really they could only afford the initial payments. Thankfully, that's changing, says Sharron Eastman, president of Big Horizon Mortgage in Kennebunk, Maine.

"Now, most lenders require that a borrower qualify at 2 percent over the start rate, which eliminates the old practice of using the ARM to qualify for more house than you can afford," Eastman says.

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